Broadcast Services; Network/Affiliate Programming Rules

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FEDERAL COMMUNICATIONS COMMISSION

47 CFR Part 73

[MM Docket No. 95-92; FCC 95-254]

Broadcast Services; Network/Affiliate Programming Rules

AGENCY: Federal Communications Commission.

ACTION: Notice of proposed rule making.

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SUMMARY: The Notice of Proposed Rule Making initiates a reevaluation of

five of the Commission's rules governing the relationship between

broadcast networks and their affiliates with respect to programming.

The five rules are the right to reject rule, the time option rule, the

exclusive affiliation rule, the dual network rule and the network

territorial exclusivity rule. The Commission raises issues about these

rules as part of its continuing reevaluation of all its network/

affiliate rules in light of changes in the telecommunications

marketplace.

DATES: Comments are due by August 28, 1995, and reply comments are due

by September 27, 1995.

ADDRESSES: Federal Communication Commission, Washington, DC 20554.

FOR FURTHER INFORMATION CONTACT:

Jane Hinckley Halprin ((202) 776-1653) or Robert Kieschnick ((202) 739-

0764), Policy and Rules Division, Mass Media Bureau.

SUPPLEMENTARY INFORMATION: This is a synopsis of the Commission's

notice of proposed rule making (nprm) in MM Docket No. 95-92, FCC 95-

254, adopted and released June 15, 1995.

The complete text of the nprm is available for inspection and

copying during normal business hours in the FCC Reference Center (Room

239), 1919 M Street, NW., Washington, DC, and also may be purchased

from the Commission's duplicating contractor, International

Transcription Service, 2100 M Street NW., Suite 140, Washington, D.C.

20037, (202) 857-3800.

SYNOPSIS OF NOTICE OF PROPOSED RULE MAKING

I. Introduction

1. The Commission initiates this proceeding to continue its

reexamination of the rules governing the relationship between broadcast

television networks and their affiliates. The five rules at issue are

briefly defined as follows. The right to reject rule provides that

affiliation arrangements between a broadcast network and a broadcast

licensee generally must permit the licensee to reject programming

provided by the network. The time option rule prohibits arrangements

whereby a network reserves an option to use specified amounts of an

affiliate's broadcast time. The exclusive affiliation rule prohibits

arrangements that forbid an affiliate from broadcasting the programming

of another network. The dual network rule generally prevents a single

entity from owning more than one broadcast television network. The

network territorial exclusivity rule proscribes arrangements whereby a

network affiliate may prevent other stations in its community from

broadcasting programming the affiliate rejects, and arrangements that

inhibit the ability of stations outside of the affiliate's community to

broadcast network programming.

2. These rules were all initially adopted in 1946. At that time,

television was in its infancy and radio was the broadcast medium of

mass national appeal. The broadcasting industry has undergone

tremendous change in the intervening decades, particularly in recent

years with the emergence of cable television and other alternative

program distributors as vigorous competitors to broadcast television

for viewers and advertisers. Further, the importance of protections for

affiliates vis-a-vis their networks appears diminished by the

availability of an ever-growing supply of alternative programming.

II. Goals of the Network/Affiliate Rules

3. The overarching theme of the Commission's analysis is whether

the rules continue to serve the purposes for which they were developed,

which were themselves rooted in the Commission's primary goals of

promoting competition and diversity in the communications industry. In

general, each of the five rules under review here was based on either

or both of the following specific goals: (1) To remove barriers that

would inhibit the development of new networks; and (2) To ensure that

licensees retain sufficient control over their stations to fulfill

their obligation to operate in the public interest. The Commission

questions whether the network rules remain necessary to achieve these

goals or, conversely, whether the rules increase the costs of

networking without producing any real benefits.

III. Changes in the Market for Affiliation

4. All of the rules at issue in this proceeding were promulgated

when terrestrial broadcasting was the only video connection to a

consumer. This fact no longer holds true as there are several possible

ways to reach a consumer, such as cable TV, direct broadcast satellite

service and wireless cable. Such alternative pipelines offer multiple

channels of video programming. Consequently, rules regulating the

broadcast television network/affiliate relations to promote the flow of

programs from producers to viewers may no longer be necessary because

of the video programming alternatives available to consumers.

5. Nonetheless, cable and other multichannel video programming

distributors may not reach enough viewers that they sufficiently

address diversity and competition concerns with respect to the video

marketplace. The Commission solicits evidence regarding the extent to

which those television households that do not subscribe to cable do

subscribe to other multichannel providers. The Commission also asks for

information regarding the broadcast networks' share of the viewing

audience vis-a-vis other programming providers. Further, even if a

substantial portion of households subscribe to video services other

than over-the-air broadcasting, those non-broadcast video programming

providers might not provide the kinds of services that would satisfy

our traditional public interest objectives. To that end, the Commission

asks commenters to address whether multichannel video programming

distributors provide sufficient local news and other programming

responsive to community needs to satisfy the Commission's longstanding

goal that the public receive these types of programming.

A. Network/Affiliate Bargaining

6. The relative bargaining positions of broadcast television

networks and their affiliates will be determined in part by the

specific conditions of each local market served by broadcast television

stations. One likely determinant of a broadcast network's bargaining

power over an independently owned affiliate is the number of

alternative outlets with which the network could choose to affiliate in

the same market. If the four largest broadcast networks are considered

as currently competing with one another for affiliates and it is

assumed for the sake of argument that these networks have preferences

for affiliating with VHF stations, then the networks would appear to

have a commanding position in bargaining with broadcast television

stations in those markets where the number of VHF stations exceeds the

number of networks (4% of the DMA markets serving 17% of television

households). If one considers UHF and VHF stations to be equally

desirable, there are 103 markets with more than four commercial

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television stations, including both VHF and UHF (49% of all DMA markets

and 84% of all television households). Based on the analysis discussed

above, the four major television networks may be in a better bargaining

position than broadcast stations in such markets. This is not to say,

however, that such a bargaining advantage constitutes undue market

power and would have a sufficient effect on programming available to

the public to justify governmental intervention. We ask commenters to

address whether preferences for VHF stations continue to exert a strong

influence on this bargaining. We also ask commenters to address the

extent to which new entrants to network programming are affecting the

competition between networks for affiliates and should be included in

our analysis.

7. For affiliates, a critical issue is the availability of

alternatives for obtaining profitable programming. In contrast to the

time when the network/affiliate rules were first applied to the

broadcast television industry, there is now an array of new network and

new non-network sources of programming. We ask for comment and analysis

of what effects, if any, alternative programming sources, especially

non-network sources, have had and will have on network/affiliate

relations.

8. The network/affiliate relationship could also be affected by the

trend toward group ownership in television broadcasting, particularly

if the Commission were to relax its national ownership limits for

commercial broadcast television group ownership. In addition,

technological advances, such as the possibility of a station

multiplexing digital signals and thereby broadcasting more than one

channel of programming, could influence the relationships between

broadcast networks and their affiliates. The Commission asks commenters

to address how changes in ownership patterns and technology are likely

to affect network/affiliate bargaining.

B. Effects of Network/Affiliate Bargaining on Other Parties

9. Existing networks may have an incentive to block entry by new

networks in order to maintain their existing market positions. One way

they might do so is to pay their affiliates sufficient compensation to

accept long-term contracts that include contractual terms that limit

entry. The Commission therefore solicits comment on the effect of the

length of the affiliation contract on the effectiveness of contractual

devices in blocking entry by new networks. It also asks whether it

might be appropriate to limit the length of affiliation contracts to

mitigate these problems.

IV. Analysis of Specific Rules

A. The Right to Reject Rule

10. Section 73.658(e) of the Commission's Rules, 47 C.F.R.

73.658(e), prohibits a broadcast station from entering into a contract

with a network that does not permit the station to (1) reject network

programs that the station ``reasonably believes to be unsatisfactory or

unsuitable or contrary to the public interest,'' or (2) substitute a

program that the station believes to be of greater local or national

importance.

11. The Notice proposes to retain the right to reject rule based on

the view that the rule is inextricably linked to a licensee's

obligation to retain control over its station and to program in the

public interest. Noting that the rule is unclear, the Notice proposes

to clarify that the rule does not give stations the right to reject

programming based solely on financial considerations. The Notice

suggests that this represents the most appropriate balance between the

competing public interest and economic efficiency concerns inherent in

the right to reject rule. The Notice seeks comment on this proposal.

B. The Time Option Rule

12. Section 73.658(d) of the Commission's Rules, 47 C.F.R.

73.658(d), prohibits arrangements between a station and a network

whereby the network retains an ``option'' on certain hours of the

station's time, which it may or may not decide to exercise. If the

network chooses not to act on its option, the station is able to air

other programming during the optioned time.

13. The Notice proposes to modify the rule by eliminating the

outright prohibition on time optioning but requiring that networks give

affiliates a particular amount of advance notice if they are going to

use an optioned time slot. The Notice points out that time optioning

may be valuable to a new network; a new network may want to book a time

slot with enough stations so that it can raise funding to develop a

programming concept, but may want to retain the ability to opt out of

those time slots if the program does not work out as expected.

Nonetheless, because unrestricted time optioning may interfere with an

affiliate's long-range planning, the Notice proposes to adopt a

notification requirement and asks commenters to propose an appropriate

notification period. In the alternative, the Notice asks whether the

rule should be repealed and notification issues left to the parties.

C. The Exclusive Affiliation Rule

14. Section 73.658(a) of the Commission's Rules, 47 C.F.R.

73.658(a), prohibits arrangements between a station and a network that

prevent the station from broadcasting the programming of another

network. The prohibition was based on the Commission's concern that

permitting stations to become exclusive affiliates of existing networks

could foreclose the development of new networks. The Notice points out

that there are now many more stations available to take the programming

of new networks, and that exclusive affiliation may be valuable to

networks and affiliates. The Notice proposes to eliminate the rule, at

least in large markets. The Notice also questions, however, whether

lifting the restriction in small markets might inhibit the development

of new television networks in those markets. The Notice seeks comment

on these issues and, if the rule is retained for small markets, on the

manner in which large/small markets should be defined.

D. Dual Network Rule

15. Section 73.658(g) of the Commission's Rules, 47 C.F.R.

73.658(g), provides that a station may not enter into an agreement with

a network that operates more than one broadcast TV network, except if

the networks are not operated simultaneously or if there is no

substantial overlap in the territories served by each network. The rule

was adopted based on the Commission's concern that dual networking

might impede the development of new networks and might confer undue

market power on one entity.

16. The Notice observes that the increase in the number of stations

since the rule was adopted has provided greater opportunity for new

networks to develop, and notes that dual networking could provide

networks with economies of scale and scope. The Notice also expresses

concern, however, that permitting merger of the existing major networks

could lead to excessive concentration of market power. The Notice seeks

comment on these issues. It also seeks comments on the effects of

technological advances that will facilitate digitization of the

broadcast industry, and how the use of multiple channels by

broadcasters would implicate the dual network rule.

E. Network Territorial Exclusivity Rule

17. Section 73.658(b) of the Commission's Rules, 47 C.F.R.

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73.658(b), prohibits a station from entering into an agreement with a

network that prevents (1) another station located in the same community

of license from broadcasting those network programs not taken by the

network affiliate; and (2) another station located in a different

community of license from broadcasting any of the network's programs.

The rule provides that it is permissible for a network affiliate to

have the ``first call'' within its community on programming offered by

the network. Similar rules for radio are included in Sec. 73.132 of the

Commission's Rules, 47 C.F.R. 73.132.

18. The Notice proposes to eliminate the first prong of the rule

but to retain and possibly modify the second prong. Elimination of the

first prong could be valuable to networks and affiliates and would

appear to have few, if any, negative effects. With respect to the

second prong, however, elimination would appear to have no efficiency

benefits and could deprive an entire local population of a network's

programming. The Commission seeks comment on these proposals. While the

Commission proposes to retain prong two, it asks commenters to address

the relative costs and benefits of expanding the permissible area for

territorial exclusivity from a station's community of license to its

DMA, Grade B contour, or some other measure.

V. Cumulative Effects

19. The Commission asks commenters to address the cumulative

effects of the rule changes proposed in the Notice. The Commission

notes that changes to the right to reject rule, the time option rule

and the exclusive affiliation rule must be carefully coordinated,

because these rules have a common focus and are closely interrelated in

that they all regulate the restraints a network may impose on its

affiliates' program choices. For example, the Commission notes that in

proposing to retain the right to reject rule it proposes to preserve

the most explicit protection of an affiliate's control over program

choice. In seeking comment on the cumulative effects of the proposals,

then, one of the primary questions is whether modification of the time

option rule and elimination of the exclusive affiliation rule would

undercut the explicit protections left by the right to reject rule.

20. The Commission also questions whether its proposals for the

first three rules would have any significant cumulative effects on the

dynamics of the network/affiliate relationship. By comparing the

current programming practices of network owned stations and those of

independently owned affiliates, the Commission may be able to discern

whether the safeguards now embodied by the right to reject, time option

and exclusive affiliation rules have produced a measurable degree of

programming autonomy on the part of the independently owned affiliates.

The Notice asks commenters to submit studies setting forth such a

comparison. Once the Commission has information on the type and degree

of autonomous affiliate behavior, it will be in a better position to

assess the relative value of each of these rules, how they act in

concert and whether its proposals as a whole would yield results that

would best serve the public interest.

21. The fourth rule, which restricts dual networking, can operate

in concert with the exclusive affiliation rule to prevent market

foreclosure by established networks to new networks. Consequently, the

Notice seeks comment on the joint effects of changing these two rules

on entry by new networks.

22. The Commission welcomes any additional comment regarding the

cumulative effect of its proposals on consumer welfare generally, and

on the historical foci of the rules at issue here--i.e., the

development of new broadcast networks and licensee control over station

operations. With respect to consumer welfare, the Commission notes that

there has been some discussion in the academic literature that

identifies a correlation between the types of restraints on exclusivity

and their cumulative effects on consumer welfare. For example, one

publication asserts that, in certain settings, the ability to enter

into exclusive dealing arrangements with multiple parties in the same

market, coupled with the opportunity to reach territorial exclusivity

agreements, may reduce consumer welfare. See T. Gabrielsen and L.

Sorgard, Vertical Restraints and Interbrand Competition (Center for

Economic Studies, University of Munich, Working Paper No. 77). The

Notice asks commenters to address these theories, as applied to the

broadcasting industry.

VI. Administrative Matters

23. Ex parte Rules--Non-Restricted Proceeding. This is a non-

restricted notice and comment rulemaking proceeding. Ex parte

presentations are permitted, except during the Sunshine Agenda period,

provided that they are disclosed as provided in the Commission's Rules.

See 47 C.F.R. 1.1202, 1.1203, 1.1206.

24. Comment Information. Pursuant to applicable procedures set

forth in Sections 1.415 and 1.419 of the Commission's Rules, interested

parties may file comments on or before August 28, 1995, and reply

comments on or before September 27, 1995. All relevant and timely

comments will be considered by the Commission before final action is

taken in this proceeding. To file formally in this proceeding,

participants must file an original and four copies of all comments,

reply comments and supporting comments. If participants want each

Commissioner to receive a personal copy of their comments, an original

plus nine copies must be filed. Comments and reply comments should be

sent to the Office of the Secretary, Federal Communications Commission,

Washington, DC 20554. Comments and reply comments will be available for

public inspection during regular business hours in the FCC Reference

Center (Room 239) of the Federal Communications Commission, 1919 M

Street NW., Washington, DC 20554.

VII. Initial Regulatory Flexibility Analysis

25. Reason for the Action: This proceeding was initiated to review

and update the Commission's rules regarding network/affiliate

relationships with respect to programming.

26. Objective of this Action: The actions proposed in the Notice

are intended to eliminate or modify the network/affiliate rules

regarding programming to enable broadcast television networks and

affiliates to better serve the public by enabling them to adjust to the

changing communications marketplace.

27. Legal Basis: Authority for the actions proposed in this Notice

may be found in Sections 4 and 303 of the Communications Act of 1934,

as amended, 47 U.S.C. 154, 303.

28. Reporting, Recordkeeping and Other Compliance Requirements

Inherent in the Proposed Rule: None.

29. Federal Rules Which Overlap, Duplicate or Conflict with the

Proposed Rule: None.

30. Description, Potential Impact and Number of Small Entities

Involved: Approximately 1,500 existing television broadcasters of all

sizes may be affected by the proposals contained in this Notice.

31. Any Significant Alternatives Minimizing the Impact on Small

Entities and Consistent with the Stated Objectives: The proposals

contained in this Notice are meant to simplify and ease the regulatory

burden currently placed on broadcast television stations of all sizes.

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32. As required by Section 603 of the Regulatory Flexibility Act,

the Commission has prepared the foregoing Initial Regulatory

Flexibility Analysis (IRFA) of the expected impact on small entities of

the proposals suggested in this document. Written public comments are

requested on the IRFA. These comments must be filed in accordance with

the same filing deadlines as comments on the rest of the notice, but

they must have a separate and distinct heading designating them as

responses to the Regulatory Flexibility Analysis. The Secretary shall

send a copy of this notice of proposed rule making, including the IRFA,

to the Chief Counsel for Advocacy of the Small Business Administration

in accordance with paragraph 603(a) of the Regulatory Flexibility Act

(Pub. L. No. 96-354, 94 Stat. 1164, 5 U.S.C. Section 601 et seq.

(1981)).

List of Subjects in 47 CFR Part 73

Television broadcasting.

Federal Communications Commission.

William F. Caton,

Acting Secretary.

[FR Doc. 95-16640 Filed 7-6-95; 8:45 am]

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