Broadcast Ownership Rules, Cross-Ownership of Broadcast Stations and Newspapers, Multiple Ownership of Radio Broadcast Stations in Local Markets, and Definition of Radio Markets

FEDERAL COMMUNICATIONS COMMISSION

47 CFR Part 73

[MB Docket 02-277, and MM Dockets 01-235, 01-317, and 00-244; FCC 03-127]

Broadcast Ownership Rules, Cross-Ownership of Broadcast Stations and Newspapers, Multiple Ownership of Radio Broadcast Stations in Local Markets, and Definition of Radio Markets

AGENCY:

Federal Communications Commission.

ACTION:

Final rule.

SUMMARY:

This document completes the Commission's biennial review of its broadcast ownership rules. The Commission replaces its absolute prohibition on common ownership of daily newspapers and broadcast outlets in the same market and its restrictions on common ownership of radio and television outlets in the same market with Cross Media Limits. The Commission also revises the market definition and the way it counts stations for purposes of the local radio rule, revises the local television multiple ownership rule, modifies the national television ownership cap from a 35% national audience reach limit to a 45% reach limit, and retains the dual network rule. The action is taken in response to section 202(h) of the Telecommunications Act of 1996, which requires the Commission to review its broadcast ownership rules on a biennial basis to determine whether the rules remain “necessary in the public interest.” The action is necessary to comply with this legislative mandate.

DATES:

Effective September 4, 2003, except for §§ 73.3555 and 73.3613 which contains information collection requirements that are not effective until approved by the Office of Management and Budget. The Commission will publish a document in the

Federal Register

announcing the effective date of these sections. A separate notice will be published in the

Federal Register

soliciting public and agency comments on the information collections, and establishing a deadline for accepting such comments.

FOR FURTHER INFORMATION CONTACT:

Mania Baghdadi, Deputy Division Chief, Industry Analysis Division, Media Bureau, 202-418-2133. For further information concerning the information collection requirements contained in this Report and Order, contact Les Smith, Federal Communications Commission, 202-418-0217, or via the Internet at

Leslie.Smith@fcc.gov.

SUPPLEMENTARY INFORMATION:

This is a summary of the Commission's Report and Order (R&O) in MB Docket No. 02-277 and MM Docket Nos. 01-235, 01-317, and 00-244; FCC 03-127, adopted June 2, 2003, and released July 2, 2003. The complete text of the R&O and the Final Regulatory Flexibility Analysis is available on the Commission's Internet site, at

www.fcc.gov.,

and is also available for inspection and copying during normal business hours in the FCC Reference Information Center, Courtyard Level, 445 12th Street, SW., Washington, DC. The text may also be purchased from the Commission's copy contractor, Qualex International, Portals II, 445 12th Street, SW., CY-B4202, Washington, DC 20554 (telephone 202-863-2893).

Synopsis of the Report and Order

1. This R&O brings to completion the Commission's third biennial ownership review of all six broadcast ownership rules. The Commission addresses these rules in light of the mandate of section 202(h) of the Telecommunications Act of 1996 (1996 Act), which requires the Commission to reassess and recalibrate its broadcast ownership rules every two years. (Telecommunications Act of 1996, Public Law 104-104, 110 Stat. 56 (1996).)

2. The

Notice of Proposed Rulemaking

(NPRM) in this proceeding (67 FR 65751, October 28, 2002), initiated review of four ownership rules: the national television multiple ownership rule;

1

the local television multiple ownership rule;

2

the radio-television cross-ownership rule;

3

and the dual network rule.

4

The first two rules have been reviewed and the proceedings remanded to the Commission by the U.S. Court of Appeals for the District of Columbia Circuit. (

Fox Television Stations, Inc.

v.

FCC,

280 F.3d 1027, 1044 (D.C. Cir. 2002) (Fox Television),

rehearing granted,

293 F. 3d 537 (D.C. Cir. 2002) (Fox Television Re-Hearing) addressing the national TV ownership rule, and

Sinclair Broadcast Group, Inc.

v.

FCC,

284 F.3d 148 (DC Cir. 2002), (Sinclair) addressing the local TV ownership rule.) After the Commission issued the NPRM, the Commission issued 12 Media Ownership Working Group (MOWG) studies for public comment. A summary of the studies, a public notice, and the text of the studies may be found at

www.fcc.gov/ownership.

1

47 CFR 73.3555(e).

2

47 CFR 73.3555(b).

3

47 CFR 73.3555(c).

4

47 CFR 73.658(g).

3. In this R&O, the Commission examines the legal context within which this review is conducted, identifies and describes the public interest policy goals that guide our decision, assesses changes in the media marketplace over time, repeals some rules, modifies others, and adopts some new rules. In consideration of the record and our statutory charge, the Commission concludes that neither an absolute prohibition on common ownership of daily newspapers and broadcast outlets in the same market (the newspaper/broadcast cross-ownership rule) nor a cross-service restriction on common ownership of radio and television outlets in the same market (the radio-television cross-ownership rule) remains necessary in the public interest. With respect to both of these rules, the Commission finds that the ends sought can be achieved with more precision and with greater deference to First Amendment interests through our modified Cross Media Limits (CML). The Commission also revises the market definition and the way it counts stations for purposes of the local radio rule, revises the local television multiple ownership rule, modifies the national television ownership cap, and retains the dual network rule.

4. The Commission, in the R&O, adopts limits both for local radio and local television station ownership. Both of these rules are premised on well-established competition theory and are intended to preserve a healthy and robust competition among broadcasters in each service. As explained in the R&O, however, because markets defined for competition purposes are generally more narrow than markets defined for diversity purposes, the Commission's ownership limits on radio and television ownership also serve our diversity goal. By ensuring that several competitors remain within each of the radio and television services, the Commission also ensures that a number of independent outlets for viewpoint will remain in every local market, thereby protecting diversity. Further, though, because local television and radio ownership limits cannot protect against losses in diversity that might result from combinations of different types of media within a local market, the Commission adopts a set of specific cross-media limits.

5. Similarly, by virtue of the staff's extensive information gathering efforts and the voluminous record assembled in this rulemaking docket, the Commission has, for the first time substantial evidence regarding the localism effects of our national broadcast ownership rules. The

Commission can, therefore, with more confidence than ever, establish a reasonable limit on the national station ownership reach of broadcast networks. In addition, under our dual network rule, the Commission continues to prohibit a combination between two of the largest four networks primarily on competition grounds, but the beneficial effects of this restriction also protect localism. In combination, the Commission's new national broadcast ownership reach cap and our “dual network” prohibition will ensure that local television stations remain responsive to their local communities.

I. Legal Framework

6. The Commission conducts this biennial ownership review within the framework established by section 202(h) of the 1996 Act, which provides: “The Commission shall review its rules adopted pursuant to this section and all of its ownership rules biennially as part of its regulatory reform review under section 11 of the Communications Act of 1934 and shall determine whether any of such rules are necessary in the public interest as the result of competition. The Commission shall repeal or modify any regulation it determines to be no longer in the public interest.” 1996 Act, section 202(h).

7. Two aspects of this statutory language are particularly noteworthy. First, as the court recognized in both

Fox Television

and

Sinclair,

“Section 202(h) carries with it a presumption in favor of repealing or modifying the ownership rules.” That is, Section 202(h) appears to upend the traditional administrative law principle requiring an affirmative justification for the modification or elimination of a rule. Second, Section 202(h) requires the Commission to determine whether its rules remain “necessary in the public interest.”

8. The Commission concludes that in its current form only the dual network rule remains necessary in the public interest as a result of competition. The Commission also concludes that the other ownership rules should be modified as described in the R&O.

9. The ownership rules adopted in the R&O must be consistent not only with the legal standard in section 202(h), but also with the First Amendment rights of affected media companies and consumers. The Commission concludes, based on the decisions in the

Fox Television

and

Sinclair

cases, that the rational basis standard is the correct First Amendment standard to apply to the broadcast ownership rules.

10. The Commission rejects, as did the court, the application of the intermediate scrutiny (

O'Brien

) standard applicable to cable operators or the strict scrutiny standard applicable to the print media and to content-based regulations. Under

O'Brien,

government regulation of speech will be upheld only if: (1) It furthers an important or substantial governmental interest; (2) the interest is unrelated to the suppression of free expression; and (3) the incidental restriction on alleged First Amendment freedom is no greater than is essential to the furtherance of that interest. In general, ownership limits on cable operators have been subject to the

O'Brien

test. The Supreme Court has determined that “promoting the widespread dissemination of information from a multiplicity of sources” is a government interest that is not only important, but is of the “highest order” and is unrelated to the suppression of free speech.

Turner Broadcasting System, Inc.

v.

FCC,

512 U.S. 622, 662-63 (1984);

Turner Broadcasting System

v.

FCC,

520 U.S. 180 (1997). On the other hand, the Commission may not burden cable operators' speech with “illimitable restrictions in the name of diversity.”

11. Strict scrutiny First Amendment analysis would require the Commission to demonstrate that its rules are the “least restrictive means available of achieving a compelling state interest.”

12. Under the rational basis standard, the Commission's broadcast regulations satisfy the First Amendment if they are “a reasonable means of promoting the public interest in diversified mass communications.”

FCC

v.

National Citizens Committee for Broadcasting,

436 U.S. 775, 802 (1978) (

NCCB

). As the court has noted, there is no unabridgeable First Amendment right to hold a broadcast license; would-be broadcasters must satisfy the public interest by meeting the Commission criteria for licensing, including demonstrating compliance with any applicable ownership limitations.

13. In applying the rational basis test, the

Fox

and

Sinclair

courts relied on longstanding Supreme Court precedent which also supports our decision.

NCCB,

436 U.S. at 802. In

NCCB,

the Supreme Court applied the rational basis test to the Commission's newspaper/broadcast cross-ownership rules, finding that they “are a reasonable means of promoting the public interest in diversified mass communications; thus they do not violate the First Amendment rights of those who will be denied broadcast licenses pursuant to them.” The

NCCB

Court explained that the rational basis test is the appropriate standard to govern our broadcast ownership regulations because spectrum scarcity requires “Government allocation and regulation of broadcast frequencies” and because these regulations are not content related. The rational basis standard therefore governs the Commission's broadcast ownership regulations, whether they govern those that own only broadcast outlets or those that might seek to combine ownership of a broadcast outlet with a newspaper.

14. First Amendment interests are implicated by any regulation of media outlets, including broadcast media. The Commission endeavors to be sensitive to those interests and to minimize the impact of our rules on the right of speakers to disseminate a message. As discussed below, our decision today to eliminate the newspaper/broadcast cross-ownership rule and the radio-television cross-ownership rule, and to modify our other local ownership rules and our national audience reach cap, turns in part on our determination that these rules in their current form are not a reasonable means to accomplish the public interest purposes to which they are directed. The Commission turns next to identifying the policy goals that will inform this determination.

II. Policy Goals

15. The Commission, in the NPRM, identified diversity, competition and localism as longstanding goals that would continue to be core agency objectives that would guide its actions in regulating media ownership. To fulfill our biennial review obligation, the Commission will first define our goals and the ways it will measure them. The Commission can then assess whether our current broadcast ownership rules are necessary to achieve these goals.

A. Diversity

16. There are five types of diversity pertinent to media ownership policy: viewpoint, outlet, program, source, and minority and female ownership diversity.

17.

Viewpoint Diversity.

Viewpoint diversity refers to the availability of media content reflecting a variety of perspectives. A diverse and robust marketplace of ideas is the foundation of our democracy. Consequently, “it has been a basic tenant of national communications policy that the widest possible dissemination of information from diverse and antagonistic sources is essential to the welfare of the public.” This policy is given effect, in part, through regulation of broadcast ownership. Because outlet owners select the content to be disseminated, the Commission has traditionally assumed that there is a positive correlation

between viewpoints expressed and ownership of an outlet. The Commission has sought, therefore, to diffuse ownership of media outlets among multiple firms in order to diversify the viewpoints available to the public. Prior Commission decisions limiting broadcast ownership concluded that a larger total number of outlet owners increased the probability that their independent content selection decisions would collectively promote a diverse array of media content. The Commission sought comment on whether this longstanding presumed link between ownership and viewpoint could be established empirically. After reviewing studies and comments, the Commission adheres to its longstanding determination that the policy of limiting common ownership of multiple media outlets is the most reliable means of promoting viewpoint diversity. The balance of evidence, although not conclusive, appears to support the Commission's conclusion that outlet ownership can be presumed to affect the viewpoints expressed on an outlet. The Commission therefore continues to believe that broadcast ownership limits are necessary to preserve and promote viewpoint diversity. A larger number of independent owners will tend to generate a wider array of viewpoints in the media than would a comparatively smaller number of owners.

18. Further, owners of media outlets clearly have the ability to affect public discourse, including political and governmental affairs, through their coverage of news and public affairs. Even if the Commission's inquiry were to find that media outlets exhibited no apparent “slant” or viewpoint in their news coverage, media outlets possess significant potential power in our system of government. The Commission believes sound public policy requires it to assume that power is being, or could be, exercised.

19. The Commission does not pass judgment on the desirability of owners using their outlets for the expression of particular viewpoints. Indeed, the Commission has always proceeded from the assumption that they do so and that its rules should encourage diverse ownership precisely because it is likely to result in the expression of a wide range of diverse and antagonistic viewpoints. The Commission merely observes here that evidence from a variety of researchers and organizations appears to disclose a meaningful connection between the identity of the outlet owner and the content delivered via its outlet(s). This evidence provides an additional basis to reaffirm the Commission's longstanding conclusion that regulating ownership is an appropriate means to promote viewpoint diversity.

20. The Commission's conclusion also should not be read to suggest that each and every incremental increase in the number of different outlet owners can be justified as necessary in the public interest. To the contrary, there certainly are points of diminishing returns in incremental increases in diversity. Moreover, such increases may, in some instances, harm the public interest in localism and competition. The balancing of these interests are addressed in the sections below dealing with individual rules.

21.

Measuring viewpoint diversity.

Viewpoint diversity is a paramount objective of this Commission because the free flow of ideas under-girds and sustains our system of government. Although all content in visual and aural media have the potential to express viewpoints, the Commission finds that viewpoint diversity is most easily measured through news and public affairs programming. Not only is news programming more easily measured than other types of content containing viewpoints, but it relates most directly to the Commission's core policy objective of facilitating robust democratic discourse in the media. Accordingly, the Commission has sought in this proceeding to measure how certain ownership structures affect news output.

22. Nonetheless, the Commission agrees with Fox and CFA that content other than traditional newscasts also contributes to a diversity of viewpoints. Television shows such as 60 Minutes, Dateline NBC, and other newsmagazine programs routinely address matters of public concern. In addition, as Fox points out, entertainment programming such as Will & Grace, Ellen, The Cosby Show, and All in the Family all involved characters and storylines that addressed racial and sexual stereotypes. In so doing, they contributed to a national dialogue on important social issues.

23. Although the Commission agrees that entertainment programs can contribute to its goal of viewpoint diversity, it will focus on the news component of viewpoint diversity where the record permits it to do so. The Commission's objective of promoting program diversity in this proceeding subsumes the viewpoint diversity contained within entertainment programming. Finally, the Commission concludes that the diversity of viewpoints by national media on national issues is greater than that regarding local issues. This is principally due to the vast array of national news sources available on the Internet, cable television and DBS.

24.

Program Diversity.

The Commission concludes that program diversity is a policy goal of broadcast ownership regulation. Program diversity refers to a variety of programming formats and content. With respect to television, this includes dramas, situation comedies, reality shows, and newsmagazines, as well as targeted programming channels such as food, health, music, travel, and sports. With respect to radio, program diversity would be reflected in a variety of music formats such as jazz, rock, and classical as well as all-sports and all-news formats. Programming aimed at various minority and ethnic groups is an important component of program diversity for both television and radio. In general, the Commission finds that program diversity is best achieved by reliance on competition among delivery systems rather than by government regulation. The rules adopted in this proceeding will ensure competition in the delivered video and radio programming markets.

25.

Outlet Diversity.

Outlet diversity means that, in a given market, there are multiple independently-owned firms. The Commission has previously found that outlet diversity has not been viewed as an end in itself, but a means through which the Commission seeks to achieve our goal of viewpoint diversity. The Commission finds that independent ownership of outlets by multiple entities in a market contributes to our goal of promoting viewpoints.

26. The Commission's review of the record persuades us that outlet diversity within radio broadcasting continues to be an important aspect of the public interest that the Commission should seek to promote. The Commission is committed to establishing a regulatory framework that promotes innovation in the field of broadcasting. Because new entrants are often a potent source of innovation, the Commission seeks to preserve opportunities for new entry in radio which remains one of the most affordable means for entering the media business.

27. The Commission believes that one benefit of outlet diversity is the promotion of public safety. In an emergency, the separation of broadcast facilities and personnel among multiple independent broadcast companies in a given market will avoid any possibility that the failure of one broadcast company to transmit critical public safety information will not leave that area without other broadcast owners to perform that service.

28.

Source Diversity.

Source diversity refers to the availability of media content from a variety of content producers. The record before us does not support a conclusion that source diversity should be an objective of the Commission's broadcast ownership policies. In light of dramatic changes in the television market, including the significant increase in the number of channels available to most households today, the Commission finds no basis in the record to conclude that government regulation is necessary to promote source diversity. Given the explosion of programming channels now available in the vast majority of homes today, and in the absence of evidence to the contrary, the Commission cannot conclude that source diversity should be a policy goal of our broadcast ownership rules.

29.

Minority and Female Ownership Diversity.

Encouraging minority and female ownership historically has been an important Commission objective, and the Commission reaffirms that goal here. NABOB recommends that the Commission should maintain our current ownership rules; use Arbitron markets to define radio markets; give greater consideration to the promotion of viewpoint diversity and minority ownership when the Commission reviews assignment of license and transfer of control applications; eliminate our policy of granting temporary waivers of our multiple ownership rules (which allow merging broadcasters 6-24 months to come into compliance with the rules); adopt a bright-line test to limit radio ownership consolidation; and urge Congress to reinstate the minority tax certificate policy.

30. IPI argues that maintenance of broadcast ownership caps will best serve the distinct programming preferences of minority groups. AWRT asks us to include the goal of increasing the number of female-owned broadcast businesses as the Commission considers changes to its broadcast ownership rules. UCC urges the Commission to “explicitly advance through its ownership rules” the policy goal of promoting broadcast ownership opportunities for women, minorities and small businesses.

31. MMTC proposes business and regulatory initiatives that “would go a long way toward increasing entry into the communications industry by minorities.” MMTC's initiatives include: (1) Equity for specific and contemplated future acquisitions; (2) enhanced outreach and access to debt financing by major financial institutions; (3) investments in institutions specializing in minority and small business financing; (4) cash and in-kind assistance to programs that train future minority media owners; (5) creation of a business planning center that would work one-on-one with minority entrepreneurs as they develop business plans and strategies, seek financing, and pursue acquisitions; (6) executive loans, and engineers on loan, to minority owned companies and applicants; (7) enhanced access to broadcast transactions through sellers undertaking early solicitations of qualified minority new entrants and affording them the same opportunities to perform early due diligence as the sellers afford to established non-minority owned companies; (8) nondiscrimination provisions in advertising sales contracts; (9) incubation and mentoring of future minority owners; (10) enactment of tax deferral legislation designed to foster minority ownership; (11) examination of how to promote minority ownership as an integral part of all FCC general media rulemaking proceedings; and (12) ongoing longitudinal research on minority ownership trends, conducted by the FCC, NTIA, or both; (13) sales to certain minority or small businesses as alternatives to divestitures. The Commission has received many creative proposals to advance minority and female ownership. Clearly, a more thorough exploration of these issues, which will allow us to craft specifically tailored rules that will withstand judicial scrutiny, is warranted. The Commission will issue a Notice of Proposed Rulemaking to address these issues and incorporate comments on these issues received in this proceeding into that proceeding.

32. The Commission sees significant immediate merit in one commenter's proposal regarding the transfer of media properties that collectively exceed our radio ownership cap. Minority Media & Telecommunications Council (MMTC) recommends that the Commission generally forbid the wholesale transfer of media outlets that exceed our ownership rules except where the purchaser qualifies as a “socially and economically disadvantaged business.” The Commission agrees with MMTC that a limited exception to a “no transfer” policy for above-cap combinations would serve the public interest. The Commission also agrees with MMTC that the benefits to competition and diversity of a limited exception allowing entities to sell above-cap combinations to eligible small entities outweigh the potential harms of allowing the above-cap combination to remain intact.

33. The Commission intends to refer the question of how best to ensure that interested buyers are aware of broadcast properties for sale to the Advisory Committee on Diversity for further inquiry and will carefully review any recommendations this Committee may proffer. As soon as the Commission receives authorization to form this committee it will ask it to make consideration of this issue among its top priorities.

B. Competition

34. From its inception, the Commission has sought to ensure that transfers and assignments of station licenses remain consistent with the policy of free competition embodied in the Communications Act. The Commission sees nothing in the 1996 Act that signifies a retreat from our deep and abiding interest in promoting and preserving competition in broadcasting. It is clear that competition is a policy that is intimately tied to our public interest responsibilities and one that the Commission has a statutory obligation to pursue. The Commission affirms our longstanding commitment to promoting competition by ensuring pro-competitive market structures. Consumers receive more choice, lower prices, and more innovative services in competitive markets than they do in markets where one or more firms exercises market power. These benefits of competition can be achieved when regulators accurately identify market structures that will permit vigorous competition.

35. In limiting broadcast ownership to promote economic competition, the Commission also takes major strides toward protecting and promoting its separate policy goal of protecting competition in the marketplace of ideas. In many markets, the record evidence shows that the Commission's competition-based ownership limits more than adequately protect viewpoint diversity in a large number of markets. Nonetheless, the Commission's analysis of the record leads it to conclude that preserving competitive markets will not, in all cases, adequately protect viewpoint diversity. The Commission finds that certain combinations in smaller markets would unreasonably threaten viewpoint diversity even if they would not result in competitive harms.

36.

Measurement of competition.

Historically the Commission has relied on assessments of competition in advertising markets as a proxy for consumer welfare in media markets.

37. Although advertising markets continue to be a reasonable basis on

which to evaluate competition among media companies, in this R&O the Commission will rely more heavily on other metrics. In the past, television stations generally faced economic competition from other television stations, and radio stations from other radio stations. The television and radio markets relied principally on advertising revenues to fund their businesses. Today, a large portion of the revenue in the television business consists of direct payment by consumers. Eighty-five percent of American households subscribe to television programming supplied by cable or direct broadcast satellite. Therefore, in analyzing markets comprised of both free over-the-air broadcasters as well as subscription delivery systems, the Commission will look to audience share as one metric for assessing the state of competition. The Commission will not discard advertising market analysis where appropriate, but it limits its reliance to discrete markets where it believes the foregoing analysis is inapplicable.

38. The Commission's public interest focus must be first and foremost on the interest, the convenience, and the necessity of the public, and not on the interest, convenience, or necessity of the individual broadcaster, or the advertiser. Thus, in evaluating the Commission's interest in preserving competitive broadcast markets, it will consider the ultimate effect that a diminution in competition would have on the consuming public. The Commission has a public interest responsibility to ensure that broadcasting markets remain competitive so that all the benefits of competition—including more innovation and improved service—are made available to the public. In setting its local television and local radio ownership caps, the Commission will rely, where possible, on measures other than shares of advertising markets in order to reflect the decreasing relevance of advertising market shares as a barometer of competition.

39.

Innovation.

The Commission concludes that it should seek to promote innovation through its broadcast ownership limits. Where a market such as broadcasting is characterized by a significant degree of non-price competition, it may be particularly important for the Commission to focus on how its ownership rules affect innovation incentives. Innovation, over longer periods of time, may represent a critical driver of consumer welfare.

40. The transition from analog to digital services by broadcasters represents a potentially significant enhancement to consumer welfare. Digital transmission of video and audio programming by television and radio stations may facilitate new services for consumers by permitting more efficient bandwidth utilization. With respect to local televisions stations, this additional bandwidth could be used to transmit high-definition programming; to transmit one or more additional program streams; or to deliver entirely new services. NAB/NASA has argued that local television ownership structures are very likely to affect stations' ability to proceed with the ongoing digital transition. NAB contends that the fixed costs associated with digital television equipment upgrades fall disproportionately on stations in smaller markets and that station combinations will speed the transition. In addition, the introduction of digital transmission by radio stations may permit greater competition and innovation in radio markets by facilitating improved signal quality and by permitting stations to deliver data along with audio to users' receivers.

41. In sum, the Commission concludes that it should seek to promote innovation through its broadcast ownership limits. Consumer welfare is likely to be enhanced when, all else being equal, the Commission permits broadcast market structures that encourage innovation. The Commission agree with IPI, however, that multiple factors influence the pace of innovation, only one of which is market structure. The Commission will therefore make ownership decisions that promote innovation in media markets based principally on evidence that particular market structures or firm characteristics tend to encourage innovation.

C. Localism

42. The Commission agrees that localism continues to be an important policy objective. Localism is rooted in Congressional directives to this Commission and has been affirmed as a valid regulatory objective many times by the courts. The Commission hereby reaffirms its commitment to promoting localism in the broadcast media. Today, the Commission seeks to promote localism to the greatest extent possible through market structure that take advantage of media companies' incentive to serve local communities.

43. Federal regulation of broadcasting has historically placed significant emphasis on ensuring that local television and radio stations are responsive to the needs and interests of their local communities. In the Communications Act of 1934, Congress directed the Commission to “make such distribution of licenses, frequencies, hours of operation, and power among the several States and communities as to provide a fair, efficient, and equitable distribution of radio service to each of the same.” In the legislative history of the 1996 Act, Congress strongly reaffirmed the importance of localism.

44. The courts too have long viewed localism as an important public interest objective of broadcast regulation. In

NBC

v.

United States,

the Supreme Court wrote: “Local program service is a vital part of community life. A station should be ready, able, and willing to serve the needs of the local community.” Last year the DC Circuit affirmed the legitimacy of Commission regulation to preserve localism, stating: “[T]he public interest has historically embraced diversity (as well as localism) * * * and nothing in section 202(h) signals a departure from that historic scope.”

45.

Measurement of Localism.

The Commission remains firmly committed to the policy of promoting localism among broadcast outlets. Today the Commission seeks to promote localism to the greatest extent possible through market structures that take advantage of media companies' incentives to serve local communities. In addition, the Commission seeks to identify characteristics of those broadcasters that have demonstrated effective service to individual local communities and to encourage their entry into markets currently prohibited by our existing rules. To measure localism in broadcasting markets, the Commission will rely on two measures: the selection of programming responsive to local needs and interests, and local news and public affairs programming quantity and quality. The Commission decided long ago that local station licensees have a responsibility to air programming that is suited to the tastes and needs of their community and that the station licensee, not a network or any other party, must decide what programming will best serve those needs. Program selection, then, is a means by which local stations respond to local community interests, and the Commission will use it as one measure of localism. Its second measure of localism can serve as a useful measure of a station's effectiveness in serving the needs of its community. As discussed below, this measure of service to local markets is relevant to the Commission's consideration of both the national television cap and its local broadcast rules.

D. Regulatory Certainty

46. The Commission considered both a case-by-case analysis and bright line rules to determine the particular regulatory framework that would best achieve our policy goals. Based on the record and our own experience administering structural ownership rules, the Commission concludes that the adoption of bright line rules, on balance, continue to play a valuable role in implementing the Commission's goals. The Commission has also decided to retain our existing framework of targeted, outlet-specific, multiple ownership rules, that cover the various media and perceived areas of potential competition and diversity concerns rather than adopting a single rule to cover all media.

47. The Commission is required to examine any proposed transfer of a broadcast license and must affirmatively find that the transfer is in the public interest. In the context of broadcast transactions, the Commission's analysis is simplified by the extensive body of structural rules it adopts herein. Thus, the extensive rulemaking proceeding used to develop these broadcast ownership rules takes full account of the Commission's public policy goals of diversity, competition, and localism. These rules squarely embody the Commission's public interest goals of limiting the effect of market power and promoting localism and viewpoint diversity.

48. The bright line rules the Commission establishes in this Order will protect diversity, competition, and localism while providing greater regulatory certainty for the affected companies than would a case-by-case review. Any benefit to precision of a case-by-case review is outweighed, in the Commission's view, by the harm caused by a lack of regulatory certainty to the affected firms and to the capital markets that fund the growth and innovation in the media industry. Companies seeking to enter or exit the media market or seeking to grow larger or smaller will all benefit from clear rules in making business plans and investment decisions. Clear structural rules permit planning of financial transactions, ease application processing, and minimize regulatory costs.

49. The Commission recognizes that bright line rules preclude a certain amount of flexibility. A case-by-case analysis would allow the Commission to reach decisions by taking into account particular circumstances of every case. For instance, bright line rules may be over-inclusive, by preventing transactions that would result in increased efficiencies, or under-inclusive, by allowing transactions that would raise concerns, if the circumstances of the case were reviewed. However, the Commission's experience with the current case-by-case analysis used for radio transactions leads it to believe that this approach in the area of media ownership is fraught with administrative problems. Currently, any radio transaction that proposes a radio station combination that would provide one station group with a 50% share of the advertising revenue in the local radio market, or the two station groups with a 70% advertising revenue, undergoes additional public interest analysis. For each of these transactions, the staff conducts an individual competitive analysis and may request additional information from the parties if it is necessary in order to reach a decision on a particular transaction. The administrative time and resources required for such an undertaking are considerable. Moreover, such an approach hinders business planning and industry investment for all radio firms falling within the ambit of our case-by-case review. The Commission is not persuaded that this approach is necessary in order to administer its ownership rules effectively.

50. The bright line rules adopted today have been developed based upon the Commission's review of the media marketplace and our assessment of what ownership limits are necessary in order to promote our goals in applying ownership rules. The Commission is confident that the modified rules will reduce the chances of precluding transactions that are in the public interest or, alternatively, permitting transactions that are not in the public interest. In addition, the Commission has discretion to review particular cases, and the Commission is obligated to give a hard look both to waiver requests, where a bright line ownership limit would proscribe a particular transaction, as well as petitions to deny.

III. Modern Media Marketplace

A. Introduction—The Evolution of Media

51. Today's media marketplace is characterized by abundance. Traditional modes of media have greatly evolved since the Commission first adopted media ownership rules in 1941, and new modes of media have transformed the landscape, providing more choice, greater flexibility, and more control than at any other time in history. In short, the number of outlets for national and local news, information, and entertainment is large and growing.

5

5

Today, there are more than 308 non-broadcast networks available for carriage by cable systems, whereas ten years ago in 1993, there were only 106 non-broadcast programming services available for carriage.

52. Section 202 (h) requires the Commission to consider whether any of its broadcast ownership rules are “necessary in the public interest as a result of competition.” This R&O confronts that challenge by determining the appropriate regulatory framework for broadcast ownership in a world characterized not by information scarcity, but by media abundance. This section tracks the history of the modern media marketplace to illustrate the rapid evolution of media outlets over the past sixty years.

B. History of the Modern Media Marketplace

53.

The Age of Radio.

At the time commercial broadcast radio was introduced during the early 1920s, newspapers were the primary source of news and information, with circulation reaching nearly 28 million readers. By 1926, just six years after the first official commercial broadcasts, there were 528 stations and 5.7 million radio sets, generating a weekly radio audience of 23 million listeners. Unlike today's targeted, niche programming, however, a typical radio station's programming in the early 1930's was largely “variety” format, including a small amount of many different types of programming. Notable and newsworthy events were, of course, the exception to the variety format. During World War II, radio proved a vital asset in the dissemination of news and public-service messages, and it boosted the morale of those remaining on the home-front.

54.

The Introduction of Television.

Although General Electric began regular television broadcasting in 1928, it was not until 1941 that the first commercial television station was introduced. In addition to a proliferation of new programming, many radio stars began to move their acts to television in the late 1940's. With World War II over, and the Depression behind them, Americans began to accept television as a cogent means of receiving information and entertainment. In 1951, just ten years after television's introduction to the public, there were more than 108 stations on the air and more than 15 million households with television sets.

55.

The Multimedia Landscape I—1960's.

By 1960, a multi-media landscape began to form, though media at that time was still dominated by broadcast radio and television. Forty

years after the introduction of commercial broadcast radio, and 19 years after the introduction of commercial broadcast television, there were 4,086 radio stations and 573 television stations. Approximately 45 million homes had a television in 1960, and about six million of those had more than one television. Relatively few markets had cable systems in 1960, and nationwide there were only about 750,000 cable subscribers. There were approximately 1,700 daily newspapers in 1960 with a total circulation of about 58 million readers. According to MOWG Study No. 1, the number of outlets per market in 1960 varied largely by size of the market.

6

The smallest markets had few choices, while large markets had comparatively more outlets for news, information, and entertainment.

6

This market definition is not necessarily consistent with the market definition of the Commission's rules.

56. An informal analysis

7

of the news and public interest programming available to the public over television in 1960, revealed that, in most markets, there was less than one-hour of national news programming broadcast daily by all the stations combined in a given market. Programming characterized as “public interest programming”

8

on average was aired for about two to three hours per-station, per-day (or approximately six to nine hours of public interest programming produced per-day by all stations combined in the markets it reviewed).

7

In this analysis, Commission staff examined current and historic

TV Guide

magazines to determine the amount of differing types of programming (local news, national news and public interest programming) provided by stations in markets of differing sizes. The study examined the amount of programming available in a sample day in three cities, New York, Little Rock, and Terre Haute, selected from the larger group of ten cities represented in MOWG Study No. 1. The three cities chosen for this particular informal study were each chosen to respectively represent small, medium, and large television markets. Programming schedules for between the hours of 6 am and midnight on July 1st of the given year were examined for each city to determine how much of each type of programming was available to consumers in the selected market. (“Three City Study”).

8

Public Interest Programming is defined for these purposes as programming of cultural, civic, children's, family, public affairs and educational interest.

57.

Television Evolves.

Between 1960 and 1963, several historical events were broadcast over television, changing the very medium itself and its role in society. The use of television by John F. Kennedy and Richard M. Nixon during the Presidential election of 1960, ushered in a new era in American politics and a new era for television as an important medium of communications. Television coverage of Martin Luther King Jr.'s “I Have a Dream” speech provided activists nationwide the information and the inspiration on which to mobilize America into one of the most turbulent and progressive eras in its history. And when word of President Kennedy's assassination was announced in 1963, an estimated 180 million Americans watched their television sets almost continuously for four days, witnessing the same tragic event in unison.

58.

The Introduction of Non-Broadcast Networks.

From its beginnings in 1948, through the late 1960's, cable television extended the reach of broadcast television. Early cable systems were born out of the need to carry television signals into areas where over-the-air reception was either non-existent or of poor quality because of interference. The creation of nationally distributed, non-broadcast cable programming enabled cable to become a competitive medium for the dissemination of news, information, and entertainment. Unlike the general interest, “variety” programming of the broadcast television networks, many non-broadcast basic cable networks provided highly specialized programming and provided it on a 24-hour basis. Thus, the inclusion of non-broadcast networks in the array of media choices gave the public continuous access to national news, information, and entertainment.

59. In 1980, with the addition of numerous pay-TV and basic cable networks, there were more than 19.2 million subscribers, an increase of 95.3%. But as a competitor to broadcast radio and television, cable's appeal was primarily national in orientation. Although some regional and local non-broadcast networks were distributed during the 1970's and 1980's, the banner offerings of cable systems during that period were nationally-distributed networks.

60.

The Introduction of Home-Use Satellite Television Technology.

Home satellite dish (“HSD”) technology was based on the same system used by cable operators to receive network signals from satellites for delivery over their terrestrial cable systems. HSD systems could gain access to hundreds of channels of programming further enhancing consumer access to non-broadcast television programming, much the same way cable served to enhance broadcast television service in its early years.

61.

The Multimedia Landscape II—1980's.

By 1980, traditional media still dominated mainstream use, but the public did have other options. Many could now choose among both broadcast and non-broadcast television programming to access news, information and entertainment. In addition to the traditional broadcast television stations offered over-the-air and via cable systems, there were also approximately 20 nationally-distributed non-broadcast networks available to the public nationwide and an unknown number of regionally distributed non-broadcast networks. The number of media outlets per market varied in 1980 based on market size, as they had in 1960. Overall, however, most markets seemed to have at least doubled the number of television stations and station owners than they had in 1960.

62. The Commission's informal analysis of the news and public interest programming available to the public via television revealed that, on average, most television stations in the markets it reviewed were airing more local news programming in1980 than they did in 1960, though some small market stations were airing less local news programming. In addition, in the large market that the Commission studied, New York, there were more television broadcast stations available to the public than there were in 1960, resulting in a greater total amount of local news produced in these markets, on a given day. In addition, a non-broadcast television network, CNN, aired national news programming for 24-hours per day, and was available to all those with access to cable or HSD systems. More broadcast television stations aired public interest programming in 1980 than in 1960, particularly in large and medium-sized markets In addition, there were several new non-broadcast television networks providing public interest programming on a 24-hour basis. In short, the addition of nationally distributed non-broadcast television networks, an increase in the number independent and affiliate broadcast television stations and in the number of hours broadcast per station, resulted in an increase in the news and public interest programming available in markets of all sizes between 1960 and 1980.

63.

Competitive Pressure Builds: A Crowded Programming Market.

The amount of competitive programming available on cable continued to increase during the eighties and into the nineties. The concise format of a majority of non-broadcast programming networks was attractive to audiences who were developing a preference for scanning quickly through the many new channel offerings available to them. While some non-broadcast networks were providing general interest fare in the mold of the traditional broadcast networks, many

provided programming geared towards a particular audience interest. Regionally distributed non-broadcast networks also flourished in the 1980's through the 1990's. Some provided regional sports, while others provided regional and local news or general regional-interest programming.

64. When the Fox broadcast network launched as a challenger to the “Big Three” networks in 1985, it entered the market building on the niche concept employed by the non-broadcast networks. Fox provided general interest fare, like its broadcast competitors, but targeted its programming to the teenage demographic. Later, in January 1995, Paramount and Warner Brothers launched the UPN and WB networks, respectively, both building on similar demographics on which Fox had initially entered the market.

65.

Significant Technological Advances: Recorded Media, Digital Compression, and the Internet.

Several significant advances in technology during the 1980's and 1990's supplied the footing for increased competitive pressure on the media marketplace. The video-cassette recorder (“VCR”) empowered the public with the ability to stray from the pre-set video programming schedule inherent in broadcast television content. Furthermore, content not available over other video media, or content which had been previously available over broadcast television was created specifically for VCR consumption. By 1986, more than 13 million VCRs had been sold in the United States.

66. Digital technology was used in the development of advanced satellite distribution systems. Direct broadcast satellite systems (“DBS”) provided an all-digital transmission of video programming, employing a small satellite dish, practical for both rural and urban deployment. DBS provides more than 200 channels of video programming to subscribers. The presence of DBS in the market for the delivery of subscription video programming has expanded the market, such that now almost all televisions households have access to subscription video. In addition, the competitive presence of DBS has forced cable television services to expand channel capacity and service options. At the end of 1994, DBS services had approximately 600,000 subscribers. Today there are more than 18 million subscribers.

67. As a result of the widespread acceptance of DBS, cable television operators began replacing much of their original infrastructure, and began employing digital technology to transmit high-quality video signals to their customers. Digital technology also expanded the channel capacity of the networks, enabling cable operators to provide vastly more channels of video programming, and furthered the ability of cable operators to implement advanced two-way services.

68. Digital versatile disc (“DVD”) players were introduced in 1997, and the personal video recorder (“PVR”) was introduced in 1999. PVR's use a hard disk drive, software, and other technology to digitally record and access programming. In addition to these other significant technological advancements of the 1980's and 1990's, the Internet has spawned an entirely new way of looking at media. Today the Internet affects every aspect of media, from video and audio, to print and personal communications. Whereas other forms of media allow for only a finite number of voices and editorially-controlled viewpoints, the Internet provides the forum for an unlimited number of voices, independently administered. Furthermore, content on the Web is multi-media; it can be read, viewed, and heard simultaneously. Since Web pages are stored on Web-hosting file servers, accessing Web content is a highly individualized activity, and any individual with access to a Web browser can access all available Web content 24-hours a day throughout the world.

69. Virtually every major media company has a corresponding Web site, today, and any individual with access to a Web-hosting file server can create a Web site for public access. As such, the Web provides an unrestrained forum for the dissemination and consumption of ideas. News and information are available on the Internet like they have never been available to the public before. Internet users can view the news source of their own choosing, or can use a news gathering service which presents information culled from thousands of news sources worldwide. Furthermore, Internet users can access content that may have appeared in print or on broadcast television at an earlier time, giving them greater control over traditionally available content.

70.

The Multimedia Landscape III—2000.

Since the 1960's, there has been tremendous growth in the media market. By 2000, American consumers had access to a multitude of media outlets, hundreds of channels of video programming, and enormous amounts of content not available just twenty, or even ten years earlier. There were more than 12,615 radio stations in 2000, and 1,616 broadcast television stations.

71. Approximately 100.8 million homes had a television in 2000 and 76.2 million of those had more than one television. There were 68.5 million cable subscribers in 2000, approximately 14.8 million DBS subscribers and 1.2 million HSD subscribers. There also were 1,480 daily newspapers in 2000 with a total circulation of 55.8 million readers. In addition to the traditional broadcast television stations offered over-the-air and via cable systems, there were 281 nationally-distributed non-broadcast networks available in 2000 and 80 regional non-broadcast networks. Approximately 42.5 million households subscribed to an Internet access provider in 2000.

72. The number of outlets per market also grew significantly between 1960 and 2000. The number of radio outlets grew by 142% from 1960 to 2000 and the number of independent radio station owners grew by 74% in that same time period. The number of television outlets grew by 217% from 1960 to 2000 and the number of independent television station owners grew by 150% in that same time period. The number of daily newspapers declined by 9% from 1960 to 2000 and the number of newspaper owners was the same in 2000 as it was in 1960.

73. The number of hours of news and public interest programming has also grown significantly since 1980. Although in most markets, only a few stations increased the amount of national news programming available from 1980, when national news was aired for about thirty to forty five minutes per station per day, there were more broadcast stations airing national news in 2003, and several non-broadcast news networks airing national news programming on a 24-hour a day basis. Public interest programming also has proliferated. Although television broadcast stations in various markets were airing about the same amount of public interest programming per-station in 2003 as they were in 1980, in 2003, there are more television broadcast stations per-market and numerous new non-broadcast networks providing such programming.

74.

The Current Competitive Landscape and Developments Since 2000.

Non-broadcast television programming continues to proliferate. We are moving to a system served by literally hundreds of networks serving all conceivable interests. Today, there are more than 308 satellite-delivered national non-broadcast television networks available for carriage over cable, DBS and other multichannel video program distribution (“MVPD”)

systems. Of the 102 channels received by the average viewing home, the four largest broadcast networks have an ownership interest in approximately 25% of those channels.

75. Since its inception, non-broadcast programming has gained significantly in popularity as compared with broadcast programming. In 2002, for the first time, cable television collectively had more primetime viewers on average over the course of the year than broadcast programming. In June 2002, cable networks for the very first time collectively exceeded a 50% share for the month, while the broadcast networks collectively registered a 38% primetime share.

76. Broadcasters are currently experimenting with, and beginning to commercially deploy, digital and high-definition television (“DTV” and “HDTV”). Digital television offers improved picture quality, the ability to provide such additional enhancements as HTDV, multicasting, and interactivity. Cable operators and DBS service providers are also beginning to provide DTV and HDTV options.

77. Today's media marketplace also provides choices to the public on an entirely new, personal level. In addition to the Web, for example, video-on-demand (“VOD”) is the newest technology being developed and deployed by cable and DBS operators. VOD services provide advertising-free material on a program-by-program basis. In addition, satellite radio became available in 2001, providing subscribers over 100 channels of commercial-free, digital audio.

78. In short, there are far more types of media available today, far more outlets per-type of media today, and far more news and public interest programming options available to the public today than ever before. Although many of these new outlets are subscription-based the competitive pressure placed upon free, over-the-air media has led to better quality and in some cases, an increase in the quantity of some types of content. In the next five to ten years, it expects more free, over-the-air content to become available as new technologies are applied to these traditional media.

IV. Local and National Framework

79. The Commission, in the R&O, adopts limits both for local radio and local television ownership. Both of these rules are premised on well-established competition theory and are intended to preserve a healthy and robust competition among broadcasters in each service. As explained in the R&O, however, because markets defined for competition purposes are generally more narrow than markets defined for diversity purposes, the Commission's limits on radio and television ownership also serve our diversity goal. By ensuring that several competitors remain within each of the radio and television services, the Commission also ensures that a number of independent outlets for viewpoint will remain in every local market, thereby ensuring that our diversity goal will be promoted. Further, though, because local television and radio ownership limits cannot protect against losses in diversity that might result from combinations of different types of media within a local market, the Commission adopts a set of specific cross-media limits.

80. Similarly, by virtue of the staff's extensive information gathering efforts and the voluminous record assembled in this rulemaking docket, the Commission has, for the first time substantial evidence regarding the localism effects of our national broadcast ownership rules. The Commission can, therefore, with more confidence than ever, establish a reasonable limit on the national station ownership reach of broadcast networks. The Commission continues to prohibit a combination between two of the largest four networks primarily on competition grounds, but the beneficial effects of this restriction also protect our interest in preserving localism. In combination, the Commission's new national broadcast ownership reaches cap and our “dual network” prohibition will ensure that local television stations remain responsive to their local communities. In sum, the modified broadcast ownership structure the Commission adopts in the R&O will serve our traditional goals of promoting competition, diversity, and localism in broadcast services. The new rules are not blind to the world around them, but reflective of it; they are, to borrow from our governing statute, necessary in the public interest.

V. Local Ownership Rules

A. Local TV Multiple Ownership Rule

81. The current local TV ownership rule allows an entity to own two television stations in the same DMA, provided: (1) The Grade B contours of the stations do not overlap; or (2)(a) at least one of the stations is not ranked among the four highest-ranked stations in the DMA, and (b) at least eight independently owned and operating commercial or non-commercial full-power broadcast television stations would remain in the DMA after the proposed combination (“top four-ranked/eight voices test”). Only those stations whose Grade B signal contours overlap with the Grade B contour of at least one of the stations in the proposed combination are counted as voices under the rule.

82. Having examined the competitive impact of other video programming outlets on television broadcast stations, the Commission concludes, in light of the myriad sources of competition to local television broadcast stations, that our current local TV ownership rule is not necessary in the public interest to promote competition. The Commission also concludes that media other than television broadcast stations contribute to viewpoint diversity in local markets. Because our current local TV ownership rule is premised on the notion that only local TV stations contribute to viewpoint diversity and does not account for the contributions of other media, the Commission concludes the current rule is not the best means to promote our diversity goal. Moreover, the Commission concludes that retaining our current rule does not promote, and may even hinder, program diversity and localism. However, the Commission finds that some limitations on local television ownership are necessary to promote competition. Accordingly, the Commission modifies our local TV ownership rule.

83. The Commission's modified local TV ownership rule will permit an entity to have an attributable interest in two television broadcast stations in markets with 17 or fewer television stations; and up to three stations in markets with 18 or more television stations. To further ensure that no single entity possesses excessive market power, however, the Commission will prohibit combinations which would result in a single entity acquiring more than one station that is ranked among the top four stations in the market based on audience share. As a result, no combinations will be permitted in markets with fewer than five television stations. Because the Commission has determined that Nielsen DMAs are the relevant geographic market, common ownership of stations in the same market will be subject to this standard without regard to whether the affected stations have overlapping contours, and the Commission eliminated the provision of its local TV ownership rule that permits same-market combinations where there is no Grade B contour overlap. The Commission also modifies our existing standard for waiver of the local TV ownership rule.

84.

The Current Rule Cannot Be Justified Under Section 202(h).

Under Section 202(h), the Commission

considers whether the local TV ownership rule continues to be “necessary in the public interest as a result of competition.”

85.

Competition.

The Commission concludes that the current local TV ownership rule is not necessary to protect competition. By limiting common ownership of television stations in local markets where at least eight independently owned TV stations would remain post-merger, the current rule prohibits mergers that would increase efficiency in small and mid-sized markets—mergers that would thereby promote competition. In addition, by limiting common ownership to no more than two television stations, the current rule prohibits efficiency enhancing mergers in the largest markets. The current rule also prohibits mergers among the top four-ranked stations.

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After reviewing all of the record evidence, the Commission concludes that this restriction remains necessary to promote competition, so it is retaining a prohibition on mergers of the top four-ranked stations in the modified local TV ownership rule adopted in the R&O.

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“The ‘top four-ranked station’ component of this standard is designed to ensure that the largest stations in the market do not combine and create potential competition concerns. These stations generally have a large share of the audience and advertising market in their area, and requiring them to operate independently will promote competition.”

86. The NPRM requested comment on the definition of the product and geographic markets in which broadcast television stations compete. Based on the record, the Commission concludes that broadcast television stations operate in three product markets: a market for delivered video programming (“DVP”); a video advertising market; and a video program production market. Although each of these markets is discussed in the R&O, the Commission's primary concern is promoting competition for viewers. Therefore, the Commission will focus on competition in the DVP market. It is this market that directly affects viewers. The advertising market and the program production market are of concern to the Commission only to the extent that protecting competition in these markets may add an extra level of protection for the public and enable all television broadcasters to compete fairly for advertising revenue and programming. What is critical to our competition policy goals, however, is the assurance of a sufficient number of strong rivals actively engaged in competition for viewing audiences. As long as there are numerous rival firms in the DVP market, viewers' interests will be advanced. The Commission first analyzes the DVP market.

87.

The DVP Market.

The evidence in the record suggests that television viewers do not consider non-video entertainment alternatives and non-delivered video to be good substitutes for watching television. In defining the market, the Commission asks whether the availability of entertainment alternatives is sufficient to prevent a significant and non-transitory increase in price. If they were good substitutes to watching television, relative changes in prices or other competitive variables should change household consumption of television. The record evidence suggests, however, that, while the price of subscribing to cable and DBS has increased faster than the rate of inflation, these price increases have not resulted in households dropping their subscriptions to cable and DBS, or reducing the amount of time households spend watching television. Thus, DVP providers have indeed been able to impose non-transitory price increases. This suggests that the relevant product market is no broader than DVP and should not include all entertainment activities.

88. For most viewers the programming choices offered by local broadcast television stations and cable networks represent good alternatives for one another. Most households subscribe to cable or DBS and receive DVP from cable networks and local broadcast television stations. These viewers need only touch their remote control to switch between the programming offered by cable networks and that of local broadcast television stations. The ease of switching from broadcast to cable networks for these households provides strong incentives for cable networks and local broadcast television stations to provide programs that attract viewers. The Commission thus finds that all the broadcast television stations and cable networks available to a significant number of cable subscribers in a DMA should be included as participants in the market for DVP.

89. The programming quality delivered to the minority of households that do not subscribe to cable or DBS is protected by the majority of households that do subscribe. Although non-subscribing households have fewer program choices than subscribing households, broadcasters cannot reduce the viewer appeal of their programming to non-subscribing households, without also reducing the viewer appeal of their programming to subscribing households. Broadcasters deliver the same programming to both subscribing and non-subscribing households. Thus, the majority of households that subscribe to cable or DBS assure that non-subscribing households receive appealing programming.

90. Although viewers easily switch between the programming offered by broadcast television stations and the programming offered by cable networks, broadcast television stations and cable networks may respond differently to changes in local market concentration. Therefore, in formulating our revised local broadcast television ownership rules, the Commission continues to draw a distinction between television broadcast stations and cable networks. It is unlikely that mergers between broadcast television stations in any local market would alter the competitive strategy of a national cable network. In contrast, local broadcast television stations offer a mix of national programming and local programming in a geographic area typically no larger than a DMA. As such, local broadcast television stations have incentives to respond to conditions in local markets. It is the unilateral and coordinated responses of local broadcast television stations to mergers between local broadcast television stations that may result in potential competitive harms. Thus, the Commission focuses on ownership of television broadcast stations, not cable networks, to promote competition in local television markets.

91.

Geographic Market for DVP.

As the Commission evaluates the competitive effects of mergers between local broadcast television stations, it must define the relevant geographic market for the DVP market. Generally, cable systems carry all the broadcast stations assigned to the DMA in which they are located, pursuant to the Commission's must-carry/retransmission consent requirements. Cable systems providing service to the majority of households also carry most major cable networks. As such, the relevant geographic market for DVP is the DMA for most mergers between local broadcast television stations.

92.

Efficiencies of Common Ownership of Television Broadcast Stations in DVP Markets.

The Commission recognizes that common ownership of stations may result in consumer welfare enhancing efficiencies. First, common ownership of broadcast television stations in a local market can facilitate efficiencies and cost savings. Joint operations can eliminate redundant studio and office space, equipment, and personnel, and increase opportunities for cross-promotion and counter-programming. The Commission's current rule hinders

the realization of efficiencies by prohibiting common ownership of television stations in most DMAs. To enhance the ability of broadcast television to compete with cable and DBS in more DMAs, the Commission believes that the potential efficiencies and cost savings of multiple station ownership should be available to stations in a larger number of DMAs than permitted by our current rule.

93. Common ownership of broadcast television stations in a local market may also spur the transition to digital television. In developing DTV build-out rules for broadcast stations, the Commission has recognized the particular financial challenges faced by stations in smaller markets. Nevertheless, many DTV construction costs do not vary with market size and thus it still may be relatively more difficult for stations in these markets to finance the transition to DTV.

94. The Commission believes that our modified rule, which permits the common ownership of at least two television stations in most markets, will have a beneficial impact on the DTV transition. One study shows that stations that are commonly owned and stations involved in joint operating arrangements are further along in the DTV transition. Common ownership could facilitate cost savings by sharing DTV equipment. Common ownership would also allow the expertise gained in transitioning one station to DTV to be transferred to other commonly owned stations.

95. The Commission's competition goal seeks to ensure that for each television market, numerous strong rivals are actively engaged in competition for viewing audiences. Although mergers among participants in the DVP market would not affect the number of delivered video program streams, they might adversely affect the types or characteristics of the programming offered by the merged entities to the detriment of viewers. The evidence for common ownership of two television stations, however, suggests that more viewers prefer the post-merger programming. The Commission therefore concludes that our current rule, which prohibits common ownership of broadcast television stations in most markets, is overly restrictive. Because some relaxation of the current rule to permit additional consolidation in local television markets would facilitate efficiencies and likely result in the delivery of programming preferred by viewers, the Commission concludes that our current rule cannot be justified on grounds of competition in the market for DVP.

96.

Video Advertising Market.

The Commission concludes that the current rule is not necessary to promote competition in the video advertising mark. The Commission concludes that our local TV ownership rule restricts many broadcasters to suboptimal size and, therefore, hinders their ability to compete with other media for advertising revenue. That said, competitive broadcast television advertising markets may require a larger number of owners of DVP than are necessary to protect competition in the DVP market. As such, assuring competition in video advertising markets may provide the public with an added level of protection. A larger number of television station owners in a local television market may also lower the potential for the exercise of market power by any one broadcaster and, therefore, help smaller or non-consolidating broadcasters compete for advertising revenue.

97. The Commission has determined that broadcast television advertising is a relevant product market. Advertisers differ in their ability to substitute between alternative media. Although some advertisers that use broadcast television stations may consider cable networks or the advertising time sold by local cable operators to be good substitutes, other advertisers may not consider these alternatives to be good substitutes. In addition, most advertisers that use broadcast television stations do not consider radio, newspapers, and other non-video delivery media to be good substitutes.

98. Our experience suggests that common ownership of two local broadcast television stations has produced efficiencies without facilitating the exercise of market power in the broadcast television advertising market. In light of evidence detailed in the R&O, that the current rule prohibits some consumer welfare enhancing combinations, the Commission concludes that the current rule is overly restrictive and not necessary to protect competition in the broadcast television advertising market.

99.

Video Program Production Market.

The Commission concludes that the current rule is not needed to protect competition in the video program production market. Broadcast television stations, along with TV networks, cable networks, program syndicators, and cable and DBS operators purchase or barter for video programming. The channel capacity of today's cable operators and DBS operators provides many more opportunities for sellers of existing and new video programming, compared with 20 years ago. Many of the programs sold today are specifically targeted to the niche audiences available on cable networks. In addition, many video programs initially sold to TV networks migrate to cable networks, and a few programs initially sold to cable networks migrate to local broadcast television stations. Same-market combinations are only of concern to the few program syndicators that sell their programming directly to individual local television stations. These program syndicators would not consider sales to group owners of television stations in multiple markets, TV networks, and cable networks to be good substitutes for the sale of programming to individual stations. These program syndicators play one television broadcast station against another in the same market to sell their programming. By precluding common ownership of broadcast television stations in most markets, our current rule provides for more owners of television broadcast stations in most markets than are necessary to assure that program syndicators receive a fair price for their programming.

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The Commission concludes, therefore, that the current rule is not necessary to protect competition in the video program production market.

10

The current rule ensures that there are at least eight independent owners in all markets with eight or more stations.

100.

Localism

. The adoption of the local TV ownership rule was not predicated on promoting localism. To the contrary, the Commission has previously recognized that relaxation of the rule was likely to promote localism. The primary evidence of “programming and service” benefits was anecdotal evidence of increases in the amount of local news and public affairs programming aired by stations participating in LMAs.

101. The Commission concludes that our current local TV ownership rule poses a potential threat to local programming, and that modification of the rule is likely to result in efficiencies that will better enable local television stations to acquire content desired by their local audiences.

102.

Local Programming Quantity and Quality.

On balance, evidence presented by commenters concerning the amount and quality of local news and public affairs programming suggests that owners/operators of same-market combinations have the ability and incentive to offer more programming responsive to the needs and interests of their communities and that in many cases, that is what they do. Thus, modifications to the rule that will allow

for greater common ownership are likely to advance our localism goal.

103.

Effect of Local Market Consolidation on Local Control Over Content.

Contrary to views expressed by some commenters, the Commission has no record evidence linking relaxation of our local ownership rule to a reduction in local control over content. The Commission also has no means of measuring the extent to which news professionals' fear of retribution by their employers is reducing the ability of television broadcast stations to offer news focused on the needs and interests of their local communities, nor can it connect such concerns to its local ownership rules.

104.

News Programming Costs and Viability of Local News Operations.

Several commenters contend that the rising cost of producing news and public affairs programming is forcing broadcasters to reduce news production and that relaxation of the local TV ownership rule would allow broadcasters to invest in new local news and public affairs programming, or at least to maintain existing programming. The Commission finds that the current local TV ownership rule is not necessary in the public interest to promote localism. More likely, the current rule is hindering our efforts to promote localism. Anecdotal and empirical evidence in the record demonstrates post-combination increases in the amount of local news and public affairs programming offered by commonly owned stations. Moreover, rising news production costs and other factors may cause broadcasters to turn to less costly programming options. Having found that there is a positive correlation between same-market combinations and the offering of local news, the Commission further agrees with those commenters who contend that modifying the local TV rule is likely to yield efficiencies that will allow broadcasters to invest in new local news and public affairs programming, or at least to maintain existing local programming.

105.

Diversity.

Section 202(h) requires that the Commission consider whether the local TV ownership rule is necessary in the public interest to promote our diversity goal. The current rule measures viewpoint diversity largely through its voice test, which ensures that all television markets have at least eight independent broadcast television voices. The Commission finds that multiple media owners are more likely to present divergent viewpoints. Upon review of the record in this proceeding as well as its own analysis of local media markets, the Commission finds that media other than television broadcast stations contribute to viewpoint diversity in local markets. The data in the record indicate that the majority of markets have an abundance of viewpoint diversity. The Commission therefore concludes that its existing local TV ownership rule is not necessary to achieve its diversity goal. In order to promote viewpoint diversity, the Commission will rely on a combination of its cross media limits as well as revised local television and local radio ownership caps. The Commission also concludes that the current rule is not necessary to promote program diversity.

106.

Viewpoint Diversity.

The Commission recognizes that a single media owner may elect to present a range of different perspectives on a particular political or social issue. It may also be accurate that a single owner of multiple media outlets in a local market may have a greater incentive to appeal to more viewers by presenting more perspectives than do multiple owners of single outlets. Even if a single owner of multiple television stations in the same market has an enhanced ability and incentive to present a broader range of viewpoints, that single owner still retains “ultimate control over programming content, who is hired to make programming decisions, what news stories are covered, and how they are covered.” The Commission concludes that it cannot rely exclusively on the economic incentives that may or may not be created by ownership of multiple television stations to ensure viewpoint diversity. However, because the Commission finds that other media contribute to viewpoint diversity in local markets, it concludes that the existing local TV ownership rule is not necessary to achieve its diversity goal.

107.

Contribution of Other Media to Viewpoint Diversity in Local Markets.

The local television ownership rule has traditionally focused only on the contribution of television broadcast stations to diversity in local markets. Based on the evidence in the record, including our own evaluation of the media marketplace, the Commission finds that media outlets other than television stations contribute significantly to viewpoint diversity in local markets, and that our current rule fails to account for this diversity.

108. The Commission finds that television broadcast stations are not the only media outlets contributing to viewpoint diversity in local markets. The market for viewpoint diversity and the expression of ideas is, therefore, much broader than the economic markets in which broadcast stations compete. In particular, in focusing on the delivered video market alone, the Commission would ignore countless other sources of news and information available to the public. As a corollary, however, limits imposed on television station combinations designed to protect competition in local delivered video markets necessarily also protect diversity; indeed they are more protective of competition in the broader marketplace of ideas given the difference in market definition.

109. The Commission does not, therefore, necessarily disagree with those commenters who maintain that a local television ownership cap can help to protect the public's First Amendment interest in a robust marketplace of ideas. We disagree, however, to the extent that they advocate a diversity-based rule that looks to broadcast-only television voices. Accepting this narrowly-defined view would result in a rule that is overly restrictive both for competition and diversity purposes, because it would fail to include other participants in some relevant product markets and in the marketplace of ideas. Such an approach cannot be squared with our statutory mandate under section 202(h) or our desire to minimize the impact of our rules on the rights of speakers to disseminate messages.

110. Accordingly, by setting our local television ownership caps only so high as necessary to protect competition in the delivered video market, the Commission will achieve necessary protection for diversity purposes without unduly limiting speech. The current rule is not necessary to protect competition and, indeed, may be harming competition in the delivered video market. It likewise cannot be justified on diversity grounds as it is overly restrictive. The Commission's modifications to the rule remedy that failing.

111.

Program Diversity.

The local TV ownership rule has not traditionally been justified on program diversity grounds. However, the NPRM sought comment on whether common ownership of multiple stations promotes program diversity, and if so, how this affects the need for the current local TV ownership rule.

112. The Commission finds that modification of the current local TV ownership rule may enhance program diversity. Program diversity is best achieved by reliance on competition among delivery systems rather than by government regulation. The Commission's local TV ownership rule will ensure robust competition in local DVP markets. As long as these markets

remain competitive, the Commission expects program diversity to be achieved through media companies' responses to consumer preferences. Nothing in the record seriously calls that conclusion into question.

113. The Commission shares the concern of Children Now that the diversity of children's educational and informational programming could be reduced if commonly owned stations in the same market air the same children's programming. The Commission therefore clarifies that where two or more stations in a market are commonly owned and air the same children's educational and informational program, only one of the stations may count the program toward the three-hour processing guideline set forth in 47 CFR 73.761.

114.

Modification of the Local Television Ownership Rule.

Based on the Commission's section 202(h) determination that the current local TV rule is no longer necessary in the public interest to promote competition and diversity, as well as our finding that the current rule may hinder achievement of our localism policy goal, the Commission must either eliminate or modify our local TV ownership restrictions. The Commission concludes that elimination of the rule would result in harm to competition in local DVP markets, thereby harming the public interest. Elimination of the rule also would adversely affect competition in the advertising and program production markets. Accordingly, the Commission modifies the rule.

115. The Commission's modified local TV ownership rule will allow ownership combinations that satisfy a two-part test: a numerical outlet cap and a top four-ranked standard. Our outlet cap will allow common ownership of no more than two television stations in markets with 17 or fewer television stations; and up to three stations in markets with 18 or more television stations. In counting television stations for purposes of this outlet cap, the Commission will include full-power commercial and noncommercial television broadcast stations assigned by Nielsen to a given DMA. For purposes of counting the television broadcast stations in the market, the Commission will include only full power authorizations (

i.e.

, it will not include Class A TV, LPTV stations or TV translators). The Commission also will exclude from our count any non-operational or dark stations. Newly constructed television stations that have commenced broadcast operations pursuant to program test authority will be included in the DMA count. Television satellite stations will be excluded from our count of full power television stations in the DMA where the satellite and parent stations are both assigned by Nielsen to the same DMA. A satellite station assigned to a DMA different from that of its parent, however, will be included in the TV station count for that DMA. DTV stations will be included in our count only if they are operating and are not paired with an analog station in the market. For purposes of our local TV ownership rule, a station will be considered to be “within” a given DMA if it is assigned to that DMA by Nielsen, even if that station's community of license is physically located outside the DMA. For purposes of our local TV ownership rule, geographic areas that are not assigned a DMA by Nielsen (

i.e.

, Puerto Rico, Guam, and the U.S. Virgin Islands) each will be considered a single market. Our current local TV multiple ownership rule does not restrict the number of noncommercial television stations that can be owned by one entity. Consistent with past practice, our modified rule also will not affect ownership of noncommercial television stations. The Commission's top four-ranked standard will prohibit combinations which would result in a single entity owning more than one station that is ranked among the top four stations in the market based on audience share. Hence, same-market combinations will not be permitted in markets with fewer than five television stations. For purposes of applying the top four-ranked standard, a station's rank will be determined using the station's most recent all-day audience share, as measured by Nielsen or by any comparable professional and accepted rating service, at the time an application for transfer or assignment of license is filed, the same method as under our current rule.

116. The contour overlap provision of the rule will be eliminated, and the modified rule will be applied without regard to Grade B contour overlap among stations. Thus, if two stations in a market do not have overlapping contours, they still cannot be combined unless there are five or more stations in the market and at least one station in the combination is not among the top four. The Commission has determined that, because of mandatory carriage requirements, the DMA—not the area within a particular station's Grade B contour—is the geographic market in which DVP providers compete. Therefore, permitting station combinations solely on grounds that they do not have overlapping contours would be inconsistent with our market definition. The majority of viewers—including those who reside in geographically large DMAs—have access to television broadcast stations that they could not view over-the-air because they can view the stations via cable. Increasingly, local stations also are available via DBS. To avoid imposing an unfair hardship on parties that currently own combinations that do not comply with the modified rule, the Commission will grandfather existing combinations. In addition, because the Commission's assumption regarding DMA-wide carriage is not universally true, and in recognition of the signal propagation limitations of UHF signals, the Commission adopts a waiver standard that will permit common ownership of stations where a waiver applicant can show that the stations have no Grade B overlap and that the stations are not carried by any MVPD to the same geographic area.

117. The public is best served when numerous rivals compete for viewing audiences. In the DVP market, rivals profit by attracting new audiences and by attracting existing audiences away from competitors' programs. The additional incentives facing competitive rivals are more likely to improve program quality and create programming preferred by existing viewers. The R&O discusses how the Commission's analysis of competition in local DVP markets supports the modified rule.

118.

Evaluating Potential Competitive Harms Within Local DVP Markets.

Consistent with the Commission's competition policy goal, our local television ownership rule seeks to preserve a healthy level of competition in the market for DVP. The state of competition in this market affects the quality and diversity of programming content and therefore the overall welfare of DVP viewers. In formulating our local TV multiple ownership rule, the Commission must assess the nature of this competition and weigh the potential benefits and anticompetitive harms that may arise from the increase in market concentration that results from a single firm owning multiple broadcast stations in a market.

119. There are two potential competitive harms that may be caused by a single firm owning multiple television stations in a market. First, ownership of multiple stations may result in “unilateral effects,”

i.e.

, the firm acquiring multiple licenses may find it profitable to alter its competitive behavior unilaterally to the detriment of viewers. An example of such an effect would be the decision to cancel local

news programming on one of the commonly-owned channels. Second, the acquisition of multiple licenses in a local market by a single firm may lead to “coordinated effects.” That is, the increase in concentration may induce a joint change in competitive behavior of all the market participants in a manner that harms viewers.

120. The Commission recognizes the importance of competition from cable networks in the market for DVP. Nevertheless, in formulating our revised ownership rules, the Commission continues to draw a distinction between television broadcast stations and non-broadcast DVP outlets. This is because television broadcast stations and cable programming networks have different incentives to react to a change in local market concentration, which suggest differing levels of unilateral and coordinated effects. In particular, cable networks are almost exclusively offering national or broadly defined regional programming. Therefore, the profit-maximizing decisions of a national cable programmer reflect conditions in the national market. It is improbable that a change in concentration in any single local market would affect the competitive strategy of a national cable network. In contrast, the Commission needs to consider the possible competitive responses from other DVP outlets in local markets, which are almost exclusively television broadcast stations. Because of the differing footprints of cable networks and television broadcast stations, any possible competitive harms are more likely to arise from changes in the behavior of stations. Thus, the Commission's rules to promote local television competition are focused on ownership of television broadcast stations.

121.

Welfare Enhancing Mergers in Local Delivered Video Markets.

The standard approach to evaluating the competitive harms of an increase in horizontal market concentration is outlined in the DOJ/FTC Merger Guidelines. The DOJ/FTC Merger Guidelines recognize the HHI level of 1800 as the maximum level of “moderate concentration.” The Commission chooses this threshold rather than the lower limit of 1000 because it recognizes the competitive pressures exerted by the cable networks. The 1800 threshold corresponds to having six equal-sized competitors in a given market. The DOJ/FTC Merger Guidelines however, are written not for a specific industry, but rather as guidelines intended for application across all industries. The Commission's rules are formulated for a specific market-the delivery of video programming- and are based on an extensive record on the extent of competition in this market and the effect of our current local TV ownership rule. This record allows the Commission to craft a more finely-tuned rule for this industry.

122. First, the nature of the DVP market is such that there is constant product innovation with new program choices each season. In such a market, a firm's market share is more fluid and subject to change than in other industries. Hence a firm's “capacity” to deliver programming can be as important a factor in measuring the competitive structure of the market as is its current market share. Second, as each broadcast station requires a license, the number of licenses that a firm controls in a market is the measure of its capacity to deliver programming. Therefore, as a starting point, a simple application of the DOJ/FTC Merger Guidelines six-firm threshold suggests that, a single firm holding three licenses in a market with 18 or more licenses, or a firm holding two licenses in a market with 12 or more licenses, would not raise competitive concerns. However, given the structure of the DVP market, a strict, overly simplistic application of the DOJ/FTC Merger Guidelines would potentially prohibit some welfare enhancing mergers and allow some anticompetitive mergers.

123. In local markets, there is a general separation between the audience shares of the top four-ranked stations and the audience shares of other stations in the market. A review of the audience shares of stations in every market with five or more commercial television stations (

i.e.

, 120 markets) indicates that in two-thirds of the markets, the fourth-ranked station was at least two percentage points ahead of the fifth-ranked station. Two percentage points represents a significant difference in audience share because for a station to jump from, for example, an eight share to a ten share, it would have to increase its audience share by 25%. Thus, although the audience share rank of the top four-ranked stations is subject to change and the top four sometimes swap positions with each other, a cushion of audience share percentage points separates the top four and the remaining stations, providing some stability among the top four-ranked firms in the market. Nationally, the Big Four networks each garner a season to date prime time audience share of between ten and 13 percent, while the fifth and sixth ranked networks each earn a four percent share. While there is variation in audience shares within local markets, these national audience statistics are generally reflected in the local market station rankings. The gap between the fourth-ranked national network and the fifth-ranked national network represents a 60% drop in audience share (from a ten share to a four share), a significant breakpoint upon which the Commission bases the rule.

124. The Commission's analysis of the top four local stations is related to its analysis of the four leading broadcast networks in connection with the dual network rule. There the Commission concludes that Big Four networks continue to comprise a “strategic group” within the national television advertising market. That is due largely to those networks' continued ability to attract mass audiences. It is this network programming that explains a significant portion of continued market leadership of the top four local stations in virtually all local markets. Thus the continued need for the Dual Network rule to protect competition at the network level also supports our decision to separate ownership of local stations carrying the programming of Big Four networks.

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11

The local television ownership rule is consistent with a key aspect of the Commission's national television ownership rule in recognizing competitive disparities among stations. The national television ownership cap recognizes competitive disparities between stations through use of the UHF discount, while the local television ownership cap recognizes competitive disparities between stations by prohibiting mergers of the top four-ranked stations in the market. The national ownership rule is an audience reach limitation, so it makes sense to adjust that limitation based on the diminished coverage of UHF stations. The local ownership rule, on the other hand, places a limitation on the number of stations that one entity may own in a market. Thus, that rule limits mergers of the top four-ranked stations in a market. Furthermore, in the local television ownership rule, we take account of a station's UHF status in considering certain waiver requests, as discussed further below. Finally, the Commission notes that the top-four merger restriction in the local television ownership rule and the UHF discount in the national television ownership rule, while analogous, are not identical and do not serve exactly the same purpose. The UHF discount is premised, in part, on promoting the development of new and emerging networks. This rationale does not apply in the local television ownership context because ownership of multiple stations in a market does not promote development of new networks. The top-four limitation in the local television ownership rule, in contrast, is premised on competition theory, which is not the basis for the national television ownership rule.

125. Permitting mergers among top four-ranked stations also would generally lead to large increases in the HHI. Although the Commission believes that mechanical application of the

DOJ/FTC Merger Guidelines

may provide misleading answers to competitive issues in the context of local broadcast transactions, as a general matter, sufficiently large HHIs establish a

prima

facie

case in antitrust suits. By allowing firms to own multiple stations, but prohibiting combinations among the top four-ranked stations, the Commission enables the market to realize efficiency gains and improve the quality of product in the video programming market while mitigating the risk of harmful coordinated or unilateral competitive harms.

126. One reason that combinations involving top four-ranked stations are less likely to yield public interest benefits such as new or expanded local news programming is that such stations generally are already originating local news. Some commenters contend that the Commission has never demonstrated that top four-ranked stations are generally the market's news providers. Yet the data provided by some of these very commenters confirms that this is the case. Further, the Commission has determined that, because there are less than four stations in some markets, the total number of top four-ranked stations is 779. Therefore, fully 85% of top four-ranked stations offer local news. Because top four-ranked stations already provide local news programming, a combination involving more than one top four-ranked station is less likely to result in a new or enhanced local news offering than would a combination involving only one top four-ranked station.

127. The Commission has also determined that same-market combinations yield efficiencies that may expedite a station's transition to DTV. However, combinations involving more than one top four-ranked station also are less likely to provide public interest benefits in the form of new DTV service. The financial position of top four-ranked stations makes the transition to DTV more affordable for these stations. Top four-ranked stations also are more likely to have made the transition to DTV than other stations. The Commission therefore concludes that it is less likely that allowing same-market combinations involving more than one top four-ranked station will expedite the provision of DTV service to the public.

128. Permitting combinations among the top four would reduce incentives to improve programming that appeals to mass audiences. The strongest rival to a top four-ranked station is another top four-ranked station. Because top four-ranked stations typically offer programming designed to attract mass audiences, as opposed to niche audiences, a new popular program offered by one top four-ranked station will have a substantial negative impact on the audience shares of the other top four-ranked stations. The enormous potential gains associated with new popular programs provide strong incentives for top four-ranked stations to develop programming that is more appealing to viewers than the programming of their closest rivals. The large number of viewers looking for new programs with mass audience appeal are the direct beneficiaries of this rivalry. When formerly strong rivals merge, they have incentives to coordinate their programming to minimize competition between the merged stations. Such mergers harm viewers.

129. The Commission's decision to allow common ownership of two television stations in markets with fewer than twelve television stations will result in levels of concentration above our 1800 HHI benchmark in markets with fewer than 12 television stations. The Commission permits this additional concentration because the economics of local broadcast stations justify graduated increases in market concentration as markets get smaller.

12

The record demonstrates that owners of television stations in small and mid-sized markets are experiencing greater competitive difficulty than stations in larger markets. Moreover, Congress and the Commission previously have allowed greater concentration of broadcast properties in smaller markets than in larger markets precisely because the fixed costs of the broadcasting business are spread over fewer potential viewers. The limits the Commission adopts in the R&O for local television ownership replicate this graduated tradeoff between optimal competition in the delivered video market (six station owners) and recognition of the challenging nature of broadcast economics in small to mid-sized markets.

12

For purposes of applying the Commission's cross media limits, which are diversity based, it found that markets with nine or more television stations have a sufficiently large number of media outlets that viewpoint diversity will be protected by its caps on local television and local radio ownership. Measuring the extent of diversity in a market is a separate question from measuring the extent of competition among a particular class of outlets, such as local television stations. Thus, a market with ten television stations can be characterized as “large” from a viewpoint diversity standpoint because of the substantial number of media outlets available in such markets, but “small to mid-sized” when considering solely competition in the delivered video market (which excludes outlets such as radio, newspaper, and the Internet).

130. Thus, the Commission must avoid an oversimplified application of the DOJ/FTC Merger Guidelines. In particular, the analysis suggests that anticompetitive harms may result from allowing the largest firms to merge, and that the Commission might lose welfare enhancing efficiency gains by disallowing mergers between stations with large audience shares and stations with small audience shares. To allow the market to realize these efficiency gains and prevent potential harms from undue increases in concentration, the Commission therefore allow combinations of two stations provided they are not both among the top four-ranked broadcast stations in the local market. In markets with at least 18 television stations, the Commission further allows a firm to own up to three stations (thus ensuring a minimum of six owners) provided that only one of them is ranked among the top four.

131.

Proposals to Retain the Existing Rule in its Current Form or With Minor Modifications.

A number of commenters urge the Commission to retain the existing rule, or make minor modifications. Children Now proposes that the Commission modify the existing rule by prohibiting common ownership of television stations with overlapping Grade B contours in the same market, as it did prior to its 1999 revisions to the rule. Other commenters urge the Commission to retain the existing rule, but to count only those voices that actually provide local programming. Children Now, among others, states that if the Commission chooses to revise the current rule by expanding the types of media voices that are considered for purposes of the local television ownership rule, it should raise the threshold voice count required to form a same-market combination.

132. The Commission has determined that retaining our current rule does not comport with our statutory mandate under section 202(h) on competition, diversity, or localism grounds. For the same reasons, the Commission disagrees with commenters who contend that an equally restrictive or more restrictive ownership rule is necessary in the public interest. Although our modified rule does not rely upon a “voice test,” it calculates the number of stations one can own in a market based, in part, on the number of stations within that market. However, our decision to “count” only broadcast television stations is based on the likely responses of participants in the DVP market to changes in local market concentration, and is aimed at achieving competition in local markets.

133. Another commenter proposes that if the Commission relaxes the rule, it should prohibit common ownership of more than one station affiliated with a top four network. The Commission's revised rule prohibits common ownership of stations that are among the top four in terms of audience share. Although such stations are often

affiliated with top four networks, the Commission concludes that audience share rank is a more accurate measure of market power than network affiliation. Therefore, the Commission does not adopt the proposal to prohibit common ownership of more than one station affiliated with a top four network.

134. Another commenter asserts that while the Commission has ample justification for retaining the current rule, if it chooses to revise the rule, it should apply an “HHI-adjusted voice count” to local TV ownership. Under this proposal, the Commission would calculate the market shares of television broadcast stations in the relevant geographic market, which would be either the DMA or a “weighted average DMA,” calculated to account for the fact that certain stations do not have cable carriage throughout the market. This commenter proposes that the Commission define highly concentrated markets as those with fewer than six equal-sized voices or a four-firm concentration ratio above 60%. Moderately concentrated markets would be those with between six and ten equal-sized voices or a four-firm concentration ratio of 40-60%. They further urge the Commission to prohibit any combination that would result in a highly concentrated market. Where a combination would result in moderate concentration, the commenter proposes that the Commission permit the combination only if it finds that the merger will serve the public interest and if the owner of the merging stations agrees to retain separate news and editorial departments in different subsidiaries of the merged entity.

135. The Commission's modified local TV ownership rule will ensure that there are at least six firms in significant number of markets (

i.e.

, all markets with 12 or more television stations), much like the commenter's proposal. The proposal does not, however, adequately address record evidence of differences in the economics of broadcast stations in smaller markets. Much like the strict application of the DOJ/FTC Merger Guidelines, the proposed test would prohibit certain mergers that will result in welfare enhancing efficiencies. Accordingly, the Commission declines to adopt this proposal. With regard to the commenter's waiver proposal, the Commission does not agree that conditioning assignments/transfers on retention of separate news departments within separate subsidiaries of a merged entity is necessary to advance our diversity, competition or localism goals. Requiring compliance with our rules, rather than conducting case-by-case evaluations or imposing merger conditions, is a more effective way to achieve these goals.

136. Entravision does not take a position on whether the rule should be relaxed, but proposes that if the rule is relaxed, the Commission should require periodic certification by owners of same-market combinations that they are not engaged in certain types of anticompetitive conduct that would adversely affect smaller broadcasters in their markets. The Commission does not agree with Entravision that modifying the local TV ownership rule will increase the likelihood of anticompetitive conduct by broadcasters that own more than one station in a market, or that a certification requirement is necessary to protect against such conduct. Certainly, if broadcasters engage in anticompetitive conduct that is illegal under antitrust statutes, remedies are available pursuant to those statutes. In addition, an antitrust law violation by a licensee would be considered as part of our character qualifications review in connection with any renewal, assignment, or transfer of a license.

137.

Proposals to Eliminate or Substantially Modify the Rule.

Several commenters propose that the Commission eliminate the current rule or substantially modify the rule in order to permit more same-market combinations. Among these are a proposal to allow common ownership of two television stations in all markets with four or more stations, a proposal to eliminate the top four-ranked standard, a proposal to eliminate the voice test provision of the rule but to retain the top four-ranked restriction, NAB's proposed “10/10” standard, and Hearst-Argyle's AMI proposal.

138. The Commission does not agree with commenters who propose that it eliminate all local television ownership restrictions. The Commission believes that the public is best served when numerous rivals compete for viewing audiences. In the DVP market, rivals profit by attracting new audiences and by attracting existing audiences away from competitors' programs. Monopolists, on the other hand, profit only by attracting new audiences; they do not profit by attracting existing audiences away from their other programs. The additional incentives facing competitive rivals are more likely to improve program quality and create programming preferred by viewers. Most commenters proposing elimination of the rule believe that antitrust authorities will protect against any public interest harms that may result from combined ownership of multiple television stations in a market. The Commission does not agree with commenters who urge us to eliminate our rules and defer all competition concerns to the antitrust authorities.

139. The Commission concludes that, as compared to the modified rule, the rule modification proposals advanced by commenters are more likely to result in anomalies and inconsistencies, or will otherwise fail to serve our policy goals. For example, by proposing that the Commission permit common ownership of two television stations in all markets with four or more stations, Nexstar attempts to account for the differing economics of stations in small markets. However, unlike our modified rule, the Nexstar proposal does not protect against combinations of the market participants with the largest audience shares, combinations that are more likely to cause competitive harms. It also permits extremely high concentration levels in the very smallest markets—there could be as few as two competitors in markets with four television stations. The Commission finds that the levels of concentration permitted by the Nexstar proposal are likely to result in harm to competition in local DVP markets.

140. Similar competitive harms would result if the Commission were to adopt proposals to eliminate or modify the top four-ranked standard. Several commenters claim that the top four-ranked standard cannot be justified on diversity or competition grounds. The Commission is not relying on the top four-ranked provision of our modified local TV ownership rule to promote diversity, although the Commission recognizes that because the marketplace for ideas is broader than the DVP market, rules intended to promote competition also will promote diversity. The Commission disagrees with commenters' claims that the top four-ranked standard is not justified on competition grounds. At the time of our last review of the local TV ownership rule, the Commission lacked sufficient record data concerning competitors to local television stations. In the instant proceeding, the Commission faces no such shortage of evidence concerning which media compete with local TV. Having determined that television competes with all providers of DVP, the Commission has crafted a rule that appropriately takes account of competition from other sources of DVP, and will ensure competition in local DVP markets. The Commission does not agree that elimination of our top four-ranked standard, use of a top three-ranked standard, or use of a tiered system that would ban mergers among

top four-ranked stations only in the largest markets and permit certain top four-ranked combinations in smaller markets, would serve the public interest. The top four-ranked combinations are likely to harm competition in the DVP market, and are less likely to produce offsetting public interest benefits.

141. The Commission believes that a more targeted approach to account for possible harms of application of the top four-ranked restriction is to establish a waiver standard tailored to the top four-ranked restriction. This approach will preserve competition in the DVP market while accommodating those instances where application of the top four-ranked restriction would harm the public interest.

142. Belo takes a nearly opposite approach, proposing that the Commission permit same-market combinations provided that they satisfy our top four-ranked standard, but eliminate our voice test. The Commission agrees that, as it is used in our modified rule, a top four-ranked prohibition is an appropriate means of protecting against combinations that would have an enhanced ability or incentive to engage in anticompetitive conduct.

143. NAB proposes that the Commission permit combinations where at least one of the stations has had, on average over the course of a year, an all day audience share of ten or less (the “10/10” proposal). NAB asserts that the audience share data used for this calculation should include viewing of out-of-market broadcast stations and cable networks, to account for competition from these sources. NAB proposes that the Commission treat the 10/10 standard as a presumption, and urges us to consider proposed combinations that do not meet this standard (including same-market combinations of three stations) on a case-by-case basis, considering factors which the Commission discusses along with other waiver proposals. NAB urges the Commission to allow broadcasters to transfer combinations created pursuant to the 10/10 standard even if one or both stations has increased its viewing share above the ten threshold at the time of such transfer. NAB asserts that requiring licensees to find separate purchasers will be disruptive and will tend to discourage investment in broadcast stations. Of the commenters who support the 10/10 proposal, some support the proposal as advanced by NAB; others support it with modifications; others suggest it be used only as a safe harbor, allowing for many other types of combinations.

144. The record in this proceeding supports a rule that will allow financially weak stations to combine with each other or with stronger stations in order to realize efficiencies. The 10/10 proposal, however, would permit mergers between financially strong stations, including top four-ranked stations, in a significant number of markets. Neither the record nor standard competitive analysis justifies a rule that will permit such mergers. The Commission's analysis suggests that combinations among the top four rated broadcast stations would create welfare harms. The Commission also finds that the proposal does not adequately justify the use of ten as a threshold. The record demonstrates that in many markets ten is the average share for any given station, sometimes even the very highest rated stations, in the market. In addition, the proposal provides no clear rationale to justify why, for example, a combination involving two stations with respective audience shares of 25 and 9 should be permitted, although a combination involving two stations with respective audience shares of 12 and 11 should be prohibited. For these reasons, the Commission rejects the 10/10 approach.

145. Hearst-Argyle advances an alternative proposal that would permit common ownership of any number of television stations in the same market provided that the stations' combined audience share does not exceed 30%. Combinations that would result in an audience share above 30% would be subject to an Audience Market Index (“AMI”) cap that is calculated in a manner similar to an HHI, but uses audience share data rather than advertising share data. If a combination would result in AMI below 1000, the combination would be permitted, regardless of the increase in concentration. A combination resulting in an AMI between 1000 and 1800 would be permitted if the increase in AMI is less than 100 points, and a combination resulting in an AMI above 1800 would be permitted only if it increases AMI by less than 50 points. Hearst-Argyle asserts that by using an audience share metric, its proposal objectively measures and protects both diversity and competition. Hearst-Argyle contends that its proposal also is likely to survive judicial scrutiny because its 30% hard cap and AMI analysis are both based on antitrust law and analysis. In addition, Hearst-Argyle contends that its proposal avoids several pitfalls of the NAB 10/10 proposal.

146. The Commission does not agree with Hearst-Argyle that simply because courts have accepted presumptions of 30% market share as demonstrating market power in the context of the antitrust statutes, it should establish a presumption that 30% is an appropriate audience share limit. The Hearst-Argyle proposal does not place specific limits on the number of broadcast television stations an entity could own in a local market. An entity could acquire any combination of stations in a local market as long as its audience share is 30 percent or less, and the AMI cap is satisfied. In many markets, this approach would permit an entity to own four, five, six or more stations. The Commission does not believe that consolidation in a market of a large number of stations with low audience share is in the public interest. Although an individual station may currently have a small audience share in the DVP market, each station's audience share has the potential to change over time. The number of stations a firm owns is a measure of its capacity to deliver programming. This capacity can be as important a factor in measuring the competitive structure of the market as is its current audience share. Moreover, much like the 10/10 proposal, the AMI test will frequently result in common ownership of stations ranked among the top four in the market. It will also permit common ownership of three stations in many more markets than will our modified rule—including some very small markets. As shown by one of Hearst-Argyle's own examples, under certain circumstances, the AMI test would even permit common ownership of three of the top four-ranked stations in a market with just five full-power television stations. Because of the anticompetitive harms that would result from combinations allowed by the AMI test, the Commission will not adopt Hearst-Argyle's AMI proposal.

147. NAB proposes an alternative that would combine the 30% audience share cap of the AMI test with a ban on common ownership of more than three stations in any market, and a ban on common ownership of more than two top four-ranked stations in the same market. For similar reasons, the Commission does not accept this proposal. The Commission believes that (1) a ban on combinations among the top four-ranked stations is necessary to promote competition; (2) a 30% share cap would permit combinations that undermine that goal; and (3) ownership of three television stations in markets with fewer than 18 stations would harm competition by consolidating capacity in the hands of too few owners. The Commission's modified rule better

effectuates our goal of promoting competition in local DVP markets.

148.

Waiver Standard.

In the Commission's Local TV Ownership Report and Order, it established a waiver standard for purposes of our local TV ownership rule. The standard permits a waiver of the current rule where a proposed combination involves at least one station that is failed, failing, or unbuilt. The Commission defines a “failed station” as one that has been dark for at least four months or is involved in court-supervised involuntary bankruptcy or involuntary insolvency proceedings. The Commission's “failing” station standard provides that it will presume a waiver is in the public interest if the applicant satisfies each of the following criteria: (1) One of the merging stations has had low all-day audience share (

i.e.

, 4% or lower); (2) the financial condition of one of the merging stations is poor; and (3) the merger will produce public interest benefits. The Commission's unbuilt station waiver standard presumes a waiver is in the public interest if an applicant meets each of the following criteria: (1) The combination will result in the construction of an authorized but as yet unbuilt station; and (2) the permittee has made reasonable efforts to construct, and has been unable to do so. For each type of waiver, the Commission also requires that the waiver applicant demonstrate that the “in-market” buyer is the only reasonably available entity willing and able to operate the subject station, and that selling the station to an out-of-market buyer would result in an artificially depressed price for the station. Any combination formed as a result of a failed, failing, or unbuilt station waiver may be transferred together only if the combination meets our local TV ownership rules or one of our three waiver standards at the time of transfer.

149. The Commission's rationale for adopting these waiver criteria was that failed, failing and unbuilt stations could not contribute to competition or diversity in local markets, and that the public interest benefits of activating a dark or unbuilt station, or preventing a failing station from going dark, outweighed any potential harm to competition or diversity. Most commenters addressing the waiver standard urge us to relax or eliminate the standard.

150. The Commission concludes that tightening our waiver standard would not promote our public interest goals. Moreover, the Commission agrees with the NAB and other commenters who urge us to expand our waiver standard to include consideration of combinations that will yield other public interest benefits. The Commission's treatment of waivers will follow the competition principles established in the DOJ/FTC Merger Guidelines, with a specific focus on the industry at hand. In particular, as in the DOJ/FTC Merger Guidelines, the Commission will consider combinations that involve firms that are not failing but that could better serve the public interest through a merger not otherwise permitted by our rules. The Commission also will consider a waiver of our local TV ownership rule where a proposed combination involves stations that do not engage in head-to-head competition because they do not have overlapping Grade B contours and are not carried by MVPDs in the same geographic areas.

151. First, for failed, failing, and unbuilt stations, the Commission retains the existing waiver standard with one exception. We remove the requirement that a waiver applicant demonstrate that it has tried and failed to secure an out-of-market buyer for the subject station. In many cases, the buyer most likely to deliver public interest benefits by using the failed, failing, or unbuilt station will be the owner of another station in the same market. The Commission believes that the efficiencies associated with operation of two same-market stations, absent unusual circumstances, will always result in the buyer being the owner of another station in that market.

152. Otherwise, however, a failed, failing, or unbuilt station clearly cannot contribute to localism, competition or diversity in local markets. Nothing in the record in the instant proceeding leads us to find otherwise. The Commission concludes that the public interest benefits of activating a dark or unbuilt station outweigh the potential harm to competition or diversity. Therefore, if it can be shown that, absent the transfer, the licensee's assets will exit the market, then the transfer is not likely to either enhance market power or facilitate its exercise. In such cases, the granting of a waiver would not be inconsistent with our competition goal.

153. The record also suggests that local television stations outside the largest markets may, in some cases, better serve the public interest through station combinations not permitted by our local television ownership rules. The Commission's new rules allow one company to own two stations in a market provided both are not ranked in the top four in ratings. This top four-ranked prohibition promotes competition by preventing the strongest competitors in each market from combining. The top four restriction is premised on evidence that the four leading stations in each market are already the strongest competitors and that combinations among them would harm the public interest by diminishing competition in the DVP market. However, NAB data shows that, as a class, smaller market stations (including both top four and other stations) are less effective competitors in the DVP market relative to stations in large markets. Therefore, the Commission allowed station combinations that would not be permitted in larger markets. However, our concern for the economics of broadcast television in small markets does not lead us to relax the top four prohibition generally because the Commission concluded that this restriction remains necessary to promote competition in the DVP market. Nonetheless, the Commission does recognize that there may be instances where application of this top four restriction will disserve the public interest by preventing marginal—but not yet “failing”—stations from effectively serving the needs of their communities. Such stations may not be financially capable of producing the amount of news and local affairs programming that they would like to provide their communities, which in turn may make them less competitive in the local marketplace. Accordingly, in order to effectuate our goals of diversity, localism, and competition, the Commission will consider waivers of the top four-ranked restriction in markets with 11 or fewer television stations. Those are the markets in which the Commission has already recognized that the economics of broadcast television justify relatively greater levels of station consolidation and better serve the public interest.

154. In considering waivers of our top four-ranked restriction, the Commission will consider a number of factors. For instance, mergers between stations that reduce a significant competitive disparity between the merging stations and the dominant station in the marketplace are particularly likely to be pro-competitive. Accordingly, waiver applicants should supply television ratings information for the four most recent ratings periods for all local stations so that the Commission may assess the competitive effect of the merger.

155. Second, the Commission also will evaluate the effect of the proposed merger on the stations' ability to complete the transition to digital television. Waiver applicants claiming that the merger is needed to facilitate

the digital transition should provide data supporting this assertion.

156. The Commission also will consider the effect of the proposed merger on localism and viewpoint diversity. Waiver applicants should submit information about current local news production for all stations in the local market and the effect of the proposed merger on local news and public affairs programming for the affected stations. Applicants stating that the merger is needed to preserve a local newscast should document the financial performance of the affected news division. Applicants for waiver of our top four-ranked restriction must demonstrate that the proposed combination will produce public interest benefits. As in the context of failing station waivers, the Commission will require that, at the end of the merged stations' license terms, the owner of the merged stations must certify to the Commission that the public interest benefits of the merger are being fulfilled. This certification must include a specific, factual showing of the program-related benefits that have accrued to the public. Cost savings or other efficiencies, standing alone, will not constitute a sufficient showing. Finally, the Commission's review of waiver requests will account for the diminished reach of UHF stations. As discussed in our national television ownership rule section, UHF stations reach fewer households than VHF stations because of UHF stations' weaker broadcast signals. Reduced audience reach diminishes UHF stations' impact on diversity and competition in local markets. Accordingly, the Commission will consider whether one or both stations sought to be merged are UHF stations.

157. The revised local TV ownership rule no longer permits combinations involving stations that do not have overlapping Grade B contours, on grounds that, because of statutory mandatory carriage requirements, most stations compete with each other on a DMA-wide basis. However, the Commission recognizes that certain stations are not carried throughout their assigned DMAs, and thus do not compete with each other within their assigned markets. Accordingly, the Commission will consider waivers of our local TV ownership rule where a party can demonstrate that the signals of the stations in a proposed combination: (a) Do not have overlapping Grade B contours; and (b) have not been carried, via DBS or cable, to any of the same geographic areas within the past year.

158. With respect to a licensee's ability to transfer or assign a combination involving a station acquired pursuant to a waiver, the Commission does not find support in the record for permitting such transfers where they do not comply with our rules. The transfer or assignment of such a combination must comply with our rules or waiver standards at the time an application to transfer or assign the station is filed.

159.

Satellite Stations.

Television satellite stations retransmit all or a substantial part of the programming of a commonly owned parent station. Satellite stations are generally exempt from the Commission's broadcast ownership restrictions. The Commission believes that continued exemption of satellite stations from the local TV ownership rule is appropriate. Our satellite station policy rests on such factors as the questionable financial viability of the satellite as a stand-alone facility, and establishment of service to underserved areas. By adding stations to local television markets where stations otherwise would not have been established, the policy advances the same goals as those underlying our local TV ownership restrictions. Since these stations are licensed only if they cannot survive as standalone, independently operated stations, the Commission finds that exempting them from the local TV ownership rule will not harm competition or diversity.

160.

Transferability of Combinations Under Modified Rule.

If an entity acquires a second or third station that complies with the Commission's modified rule, it will not later be required to divest if the number of stations in the market subsequently declines below the level consistent with our outlet cap, or if more than one commonly owned station subsequently becomes a top four-ranked station in the market. The impact of such a “springing” rule would be highly disruptive to the market. Like our other rules, however, the Commission will not ignore the public interest underpinnings at the time of a subsequent sale of the combination. Thus, absent a waiver, a combination may not be assigned or transferred to a new owner if the combination does not satisfy our local TV ownership cap at the time of the proposed assignment or transfer.

B. Local Radio Ownership Rule

161. The local radio ownership rule limits the number of commercial radio stations overall and the number of commercial radio stations in a service (AM or FM) that a party may own in a local market. In the 1996 Act, Congress directed the Commission to revise those limits to provide that: (1) In a radio market with 45 or more commercial radio stations, a party may own, operate, or control up to 8 commercial radio stations, not more than 5 of which are in the same service (AM or FM); (2) in a radio market with between 30 and 44 (inclusive) commercial radio stations, a party may own, operate, or control up to 7 commercial radio stations, not more than 4 of which are in the same service (AM or FM); (3) in a radio market with between 15 and 29 (inclusive) commercial radio stations, a party may own, operate, or control up to 6 commercial radio stations, not more than 4 of which are in the same service (AM or FM); and (4) in a radio market with 14 or fewer commercial radio stations, a party may own, operate, or control up to 5 commercial radio stations, not more than 3 of which are in the same service (AM or FM), except that a party may not own, operate, or control more than 50 percent of the stations in such market.

162. The Commission concludes that the numerical limits in the local radio ownership rule are “necessary in the public interest” to protect competition in local radio markets. The Commission concludes, however, that the rule in its current form does not promote the public interest as it relates to competition because (1) its current contour-overlap methodology for defining radio markets and counting stations in the market is flawed as a means to protect competition in local radio markets, and (2) the current rule improperly ignores competition from noncommercial radio stations in local radio markets. To address those concerns, the Commission modifies the rule to replace the contour-overlap market definition with an Arbitron Metro market and to count noncommercial stations in the radio market; and the Commission initiates a new rulemaking proceeding as part of this item to define markets for areas of the country where Arbitron Metros are not defined. Although the Commission primarily relies on competition to justify the rule, the Commission recognizes that localism and diversity are fostered when there are multiple, independently owned radio stations competing in the same market; its competition-based rule, therefore, will also promote those public interest objectives. The Commission also conclude that, consistent with our focus on competition, joint sales agreements (“JSAs”) will result in attribution of the brokered station to the brokering party under certain conditions.

163.

Section 202(h) Determination.

Under section 202(h), the Commission considers whether the local radio

ownership rule continues to be “necessary in the public interest as a result of competition.” In determining whether the rule meets that standard, the Commission considers whether the rule serves the public interest, which, in radio broadcasting, traditionally has encompassed competition, localism, and diversity. The Commission examines each of these public interest objectives in turn.

164.

Competition.

In the Policy Goals section, the Commission explained how the public interest is served by preserving competition in relevant media markets. Although limits on local radio ownership are generally necessary to serve the public interest, the Commission concludes that the current local radio ownership rule does not serve the public interest as it relates to competition for two reasons. First, the current rule uses a methodology for defining radio markets and counting the number of radio stations in a market that has not protected against undue concentration in local radio markets. Second, the current rule fails to account for the competitive presence of noncommercial stations in a market. Accordingly, the Commission modifies the rule to address these concerns.

165.

The Product Market Definition.

To measure the state of competition in radio broadcasting, the Commission first must determine the relevant product markets in which radio stations compete and the other media, if any, that compete in those markets. The Commission concludes that radio broadcasters operate in three relevant markets: radio advertising, radio listening, and radio program production.

166.

The Radio Advertising Market.

The Commission concludes that advertisers do not view radio stations, newspapers, and television stations as substitutes. A number of commenters have argued that there is little substitution between advertising on broadcast TV and newspapers. Further, empirical studies confirm that advertisers do not view ads in newspapers and broadcast radio as substitutes. The Commission acknowledges that the studies discussed in the full text of the R&O focus on national advertising markets. Nothing has been submitted in the record, however, that suggests that local advertisers are better able to substitute between radio and other media than are national advertisers, and the studies' results are consistent with the results of MOWG Study No. 10, which did examine local advertisers.

167.

The Radio Listening Market.

The Commission concludes that radio listening is a relevant product market. There is no evidence that radio listeners consider non-audio entertainment alternatives to be good substitutes for listening to the radio. The Commission therefore disagrees with commenters who argue that the relevant market should be broadened from radio listening to include non-audio entertainment options. The Commission also disagrees with commenters who argue that the relevant product market should be broadened to include other delivered audio media, such as Internet audio streaming and satellite radio. Internet audio streaming may be a substitute for broadcast radio when listening takes place while working on a computer or in a small office environment. A significant portion of audio listening, however, occurs while driving or otherwise outside of the office or home. Since most people do not access Internet audio from a mobile location, the Commission concludes that Internet audio streaming is not a substitute for broadcast radio for a significant portion of audio listening. Similarly, satellite radio may be a substitute for broadcast radio for the fewer than 600,000 people that subscribe to satellite radio. But the vast majority of the population does not subscribe to a satellite radio service. Accordingly, the Commission concludes that satellite radio is not yet a good substitute for broadcast radio for most listeners.

168. Preserving competition for listeners is of paramount concern in the Commission's public interest analysis. Although competition in the radio advertising market and the radio program production market indirectly affects listeners by enabling radio broadcasters to compete fairly for advertising revenue and programming—critical inputs to broadcasters' ability to provide service to the public—it is the state of competition in the listening market that most directly affects the public. When that market is competitive, rivals profit by attracting new audiences and by attracting existing audiences away from competitors' programs. Monopolists, on the other hand, profit only by attracting new audiences; they do not profit by attracting existing audiences away from their other programs. Because the additional incentives facing competitive rivals are more likely to improve program quality and create programming preferred by existing listeners, it is critical to the Commission's competition policy goals that a sufficient number of rivals are actively engaged in competition for listening audiences. Limits on local radio ownership promote competition in the radio listening market by assuring that numerous rivals are contending for the attention of listeners.

169.

Radio Program Production Market.

Radio stations seek to acquire audio programming from a variety of audio program producers. Many sellers of audio programming do not have adequate substitutes for local radio stations. The record indicates that radio stations are an important mechanism by which the American public is made aware of new music. Moreover, the record suggests no reasonable alternative available to producers of radio talk shows—a type of radio programming that has become increasingly popular in the last decade. To the extent that the radio stations in a local community are owned by one or a few firms, those firms could constitute a bottleneck that would impede the ability of radio programming producers to make their programming available to consumers in that community. Accordingly, the Commission concludes that radio programming constitutes a separate relevant product market.

170.

Geographic Market Definition.

There is no serious dispute that the relevant geographic market for the product markets in which radio stations compete is local. The parameters of the local market, however, have been a source of considerable debate and controversy. The Commission currently uses a contour-overlap methodology for defining radio markets and determining the number of radio stations that are in those markets. That methodology has been subject to intense criticism for producing unrealistic and irrational results. Based on the record and our own experience, the Commission now concludes that the contour-overlap system should be replaced by a more rational and coherent methodology based on geographically-determined markets to promote more effectively our competition policy goals.

171.

Problems with the Existing Radio Market Definition and Counting Methodologies.

The Commission currently relies on the principal community contours of the commercial radio stations that are proposed to be commonly owned to determine the relevant radio market in which those stations participate and to count the other radio stations that are in the market. We first consider whether an area of overlap exists among the principal community contours of all of the stations proposed to be commonly owned. If no such overlap area exists, then the radio stations involved are presumed to be in separate radio

markets, and the local radio ownership rule is not triggered. If one or more areas of contour overlap exist, however, the rule is triggered, and the Commission must determine whether the proposed combination complies with the limits specified in the rule.

172. The Commission first asks how many stations a party would own in the relevant radio market (

i.e.

, the “numerator” of the fraction upon which the numerical limits in the local radio ownership rule are based). Under our current methodology, the Commission deems the radio stations whose principal community contours mutually overlap to be in the same market, and it deems those stations to be the only stations owned by the common owner in that market. In some instances, a radio station's principal community contour will overlap some, but not all, of the principal community contours of other commonly owned radio stations. In those cases, separate radio markets will be formed from the mutual contour overlaps of different subsets of commonly owned radio stations. We nevertheless apply the same rule: In each of those separate markets, it deems the radio stations whose principal community contours mutually overlap to be in the same market, and it deems those stations to be the only stations owned by the common owner in that market.

173. After calculating the numerator for a particular radio market, the Commission next determines the size of the market. To do this, the Commission again relies on principal community contours. The Commission counts as being in the relevant radio market the radio stations that are included in the numerator. We add to this number every other commercial radio stations whose principal community contour overlaps the principal community contour of at least one of the stations counted in the numerator. The total represents the size of the market against which the number of commonly owned stations is evaluated to determine whether the proposed combination complies with the local radio ownership rule.

174. One significant problem with the current contour-overlap system is what is known as the “Pine Bluff” problem, or the “numerator-denominator” inconsistency. A party is deemed to own only those stations that are represented in the numerator. In calculating the denominator, however, any radio station whose principal community contour overlaps the principal community contour of at least one of the radio stations in the numerator is counted as being in the market, regardless of who owns that station. As a result, the denominator may include radio stations that are owned by the same party that owns the radio stations represented in the numerator. Because those stations are counted in the denominator, they are by definition “in” the market, but they would not count against the party's ownership limit in that market unless their principal community contours overlap the principal community contours of all of the radio stations in the numerator.

175. The numerator-denominator inconsistency has two potential and interrelated effects that highlight the problems with our current methodology. First, by counting commonly owned stations in the denominator that are not counted in the numerator, a party may be able to use its own radio stations to increase the size of the radio market and thereby “bump” itself into a higher ownership tier. Second (and more commonly), the inconsistency enables a party to own radio stations that are in the relevant radio market (as determined by our rules) without having those stations count against the party's ownership limit in that market. The current system of counting radio stations thus enables a party, by taking advantage of the effects of the numerator-denominator inconsistency, to circumvent our limits on radio station ownership, which are intended to protect against excessive concentration levels in local radio markets.

176. The Commission cannot fix the problems associated with our current methodology merely by excluding commonly owned stations from the denominator or including those stations in the numerator. If the Commission excludes commonly owned stations from the denominator, then it would be determining which radio stations are in the market based on who owns those stations, a distinction that would be both unprincipled and unprecedented in the history of competition analysis. If the Commission includes in the numerator commonly owned stations represented in the denominator, a party's ownership level in a particular market may be overly inflated by outlying stations far from the area of concentration. Each of these proposals thus would create new “reverse” anomalies to cancel out the effects of the numerator-denominator inconsistency.

177. The Commission's experience with the current contour-overlap methodology leads us to the conclusion that it is flawed as a means to preserve competition in local radio markets, and that the Commission should take an entirely new approach to market definition. As is clear from our description of the current market definition and counting methodologies, the size of a radio market under our current system is unique to the proposed combination being evaluated. A different combination of radio stations, or the addition or subtraction of a radio station from the combination, has the potential to change the area covered by the principal community contours of the combination and, thus, to change the number of commercial radio stations that are counted as being in the market. This is a singular and unusual method for determining the size of a market. Under traditional antitrust principles, the “relevant geographic market” is used to identify the parties that compete in that market. Our contour-overlap methodology, in contrast, uses the outlets of one party—commonly owned stations with mutually overlapping principal community contours—to define the local radio market and identify other market participants. This is an inherent aspect of the contour-overlap methodology that is not in line with coherent and accepted methods for delineating geographic markets for purposes of competition analysis.

178. The conceptual problems with the contour-overlap methodology have significant implications for our ability to guard against undue concentration in local radio markets. Because radio stations with larger signal contours are more likely to reach a wider audience, consolidation of these radio stations in the hands of one or a few owners increases the potential for market power in local radio markets. Yet the contour-overlap system actually encourages consolidation of powerful radio stations because stations with larger signal contours are more likely to create larger radio markets, which make it more likely that a party would be able to acquire additional radio stations in that market. Thus, by creating this perverse incentive, the contour-overlap methodology may undermine the primary public interest rationale for the local radio ownership rule.

179. Other aspects of our contour-overlap methodology also limit its usefulness in protecting and promoting competition. The method for determining which stations are in a market often does not reflect the area of true competition among radio stations. The Commission currently counts a radio station as being a competitor in a radio market if its principal community contour overlaps any one of the principal community contours that form the market boundary. Those radio stations may be too distant to serve effectively either the listeners or the

advertisers in the geographic area in which concentration is occurring, but they are included in the market because of the happenstance of the size, shape, or location of one or more of the principal community contours of the radio stations involved.

180. The contour-overlap methodology also makes it difficult to measure concentration levels in local radio markets accurately. As currently implemented, the methodology does

not

examine the number of radio station owners in a market; it only considers how many radio station signals cross the market boundary created by the principal community contours of commonly owned stations with mutually overlapping contours. Those signals may be owned by only one other party; indeed, because of the numerator-denominator inconsistency, those radio stations may be owned by the same party. The current methodology simply does not take ownership into account, which makes an accurate measure of local radio concentration difficult to achieve.

181. Consistency suffers as well. Under the contour-overlap methodology, every combination operates in a radio market that is unique to that combination. Thus, there is no common metric that the Commission can use to compare the effect of two different combinations on competition. In fact, the Commission cannot even r

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