Radio Broadcast Services; Television Program Practices

FEDERAL COMMUNICATIONS COMMISSION

47 CFR Part 73

[MM Docket No. 94-123; FCC 95-314]

Radio Broadcast Services; Television Program Practices

AGENCY: Federal Communications Commission.

ACTION: Final rule.

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SUMMARY: This Report and Order repeals the Commission's Rules regarding

the Prime Time Access Rule. The Commission had invited comments in a

rulemaking proceeding to assess the legal and policy justifications, in

light of current economic and technological conditions, for the Prime

Time Access Rule and to consider the continued need for the rule in its

current form. Based on the comments received from interested parties,

including economic and empirical analyses of the effects of repealing

or retaining the rule, the Commission concludes that the public

interest warrants the repeal of PTAR. In repealing the rule, the

Commission believes a one-year transition period is appropriate to

provide parties time to adjust their programming strategies and

business arrangements.

EFFECTIVE DATE: August 30, 1996.

FOR FURTHER INFORMATION CONTACT: Charles W. Logan or Alan E. Aronowitz,

Mass Media Bureau, Policy and Rules Division, Legal Branch, (202) 776-

1663, or Alan Baughcum, Mass Media Bureau, Policy and Rules Division,

Policy Analysis Branch, (202) 739-0770.

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

Report and Order in MM Docket No. 94-123, adopted July 28, 1995, and

released July 31, 1995. The complete text of this document is available

for inspection and copying during normal business hours in the FCC

Reference Center (Room 239), 1919 M Street NW., Washington, D.C. 20554,

and may be purchased from the Commission's copy contractor,

International Transcription Service, (202) 857-3800, 2100 M Street NW.,

Washington, D.C. 20037.

Synopsis of the Report and Order

1. The Commission's Prime Time Access Rule (``PTAR'') generally

prohibits network-affiliated television stations in the top 50 prime-

time television markets (``Top 50 Market Affiliates'') from

broadcasting more than three hours of network programs (the ``network

restriction'') or former network programs (the ``off-network

restriction'') during the four prime time viewing hours (i.e., 7 to 11

p.m. Eastern and Pacific times; 6 to 10 p.m. Central and Mountain

times). The rule exempts certain types of programming (e.g., runovers

of live sports events, special news, documentary and children's

programming, and certain sports and network programming of a special

nature) which are not counted toward the three hours of network

programming.\1\ PTAR was promulgated in 1970 in response to a concern

that the three major television networks--ABC, CBS and NBC--dominated

the program production market, controlled much of the video fare

presented to the public, and inhibited the development of competing

program sources. The Commission believed that PTAR would increase the

level of competition in program production, reduce the networks'

control over their affiliates' programming decisions, and thereby

increase the diversity of programs available to the public. PTAR also

came to be viewed as a means of promoting the growth of independent

stations in that they did not have to compete with Top 50 Market

Affiliates in acquiring off-network programs to air during the access

period.

\1\47 CFR 73.658(k)(1)-(6).

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2. On October 20, 1994, the Commission adopted a Notice of Proposed

Rule Making (``Notice''), 59 FR 55402 (November 7, 1994), in this

docket to conduct an overall review of the continuing need for PTAR

given the profound changes that have occurred in the television

industry since 1970. In response to the Notice, we received a

substantial number of comments from interested parties, including

economic and empirical analyses of the effects of repealing or

retaining the rule.

3. Based on this record, the Commission concludes that PTAR should

be extinguished. The three major networks do not dominate the markets

relevant to PTAR. There are large numbers of sellers and buyers of

video programming. Entry, even by small business, is relatively easy.

There are a substantially greater number of broadcast programming

outlets today than when PTAR was adopted in 1970 due to the growth in

numbers of independent stations. In addition, nonbroadcast media have

proliferated. We also find, given these market conditions, and the

record before us,

[[Page 44774]]

that the rule is not warranted as a means of promoting the growth of

independent stations and new networks, or of safeguards affiliate

autonomy. Indeed, the rule generates costs and inefficiencies that are

not now offset by substantial, if any, benefits.

4. The Commission thus finds that the public interest warrants the

repeal of PTAR. In scheduling repeal of the rule, a one-year transition

period is appropriate to provide parties time to adjust their

programming strategies and business arrangements prior to the

elimination of a regulatory regime that has been in place for 25 years.

Consequently PTAR will be repealed effective August 30, 1996.

5. This conclusion is consistent with the Commission's 1993

decision to schedule the repeal of the financial interest and

syndication rules ((``fin/syn''), which was upheld on appeal by the

U.S. Court of Appeals for the Seventh Circuit. See Capital Cities/ABC,

Inc. V. FCC, 29 F.3d 309 (7th Cir. 1994). We determined that repeal of

the fin/syn rules was warranted given the increased competition facing

the networks and the conditions in the television programming

marketplace. Based upon these findings we eliminated a number of the

fin/syn rules immediately and set a timetable for repeal of the

remainder.

6. The Commission reaches its conclusion to PTAR by analyzing the

following factors: First, it evaluates whether the networks dominate

the markets relevant to the rule, or would be likely to dominate them

in the absence of PTAR. Second, it assesses the costs imposed by the

rule. Third, taking into account its findings regarding whether the

networks dominate and the costs of the rule, it analyzes whether the

rule is necessary as a means of pursuing the benefits of fostering

independent programming, promoting the growth of independent stations

and new networks, and safeguarding affiliate autonomy.

I. The Networks and Their Affiliates Do Not Dominate Markets

Relevant to PTAR

7. The Commission's adoption of PTAR in 1970 was premised on a view

that the three networks dominated television programming. The

Commission's analysis of the record leads it to conclude that neither

the networks nor their affiliates dominate video programming

distribution or the video programming production market. The Commission

reaches this conclusion by employing a two-step market power analysis

which involves defining the relevant market and examining evidence of

undue market power.

A. Video Programming Distribution

8. PTAR applies to ABC, CBS, and NBC affiliates in the Top 50 PTAR

Markets. These networks and their affiliates display or ``distribute''

television programming to viewers and sell air time to customers

seeking to advertise. In program distribution, networks and their

affiliates compete with programs broadcast by independent stations. The

list of economic substitutes for network broadcasts may also include

cable programs, programs over satellite television systems,

videocassette rentals, and other alternatives. For purposes of its

review of PTAR, the Commission will focus on program distribution

comprising only broadcast television station operators and their

networks. This is a conservative, perhaps overly narrow, approach given

that a good case can be made that, from the viewers' perspectives,

cable system operators inter alia are economically relevant alternative

distributors of video programming. Since PTAR constrains the market

activities of affiliates of the three major networks in the Top 50 PTAR

Markets, the Commission's primary focus in this section is whether

these network affiliates would be able to exercise undue market power

in the delivery of video programming in their respective local markets.

9. Based on the record, it is clear that, in the Top 50 PTAR

Markets, the three original networks and their affiliates face more

competition for viewers than they did in 1970 or even in 1980. There

are substantially greater numbers of television stations than there

were in 1970. For example, the number of independent stations has grown

by 450 percent during this time. The effects of this competition are

readily apparent in examining the networks' audience shares over the

years. Looking at prime time alone, the time period when the networks'

viewing shares are the highest, each network's average share of the

prime time audience declined from a 31.1 viewing share during the 1971/

72 season to a 20.2 share during the 1993/94 season, a loss of almost

one-third of each network's audience. ABC, CBS, NBC, and Fox had

individual 1993/94 prime-time audience shares of 20.1 , 22.7, 17.8 and

11.4 percent, respectively. The Commission's calculation of affiliate

audience shares in each of the Top 50 PTAR Markets is consistent with

network audience shares nationally. No single network or network

affiliate would seem to have the ability to dominate video programming

distribution in any of these local markets.

10. Nor is it likely that affiliates in a local Top 50 PTAR Market

would dominate as a group since video programming distribution is only

moderately concentrated. In its 1993 decision setting a timetable for

repeal of the fin/syn rules, the Commission stated that ``inter-network

competition for programming is `intense.''' Nothing in the record

before us calls this conclusion into doubt, as the networks continue to

wage a ratings war that has only been heightened with the emergence of

the Fox network.

11. The Commission thus concludes that, even focusing narrowly on

local broadcast video programming distribution, the three networks and

their affiliates cannot singly or jointly dominate video program

distribution in the Top 50 PTAR Markets. This is a strong conclusion

because the inclusion of additional television alternatives such as

cable, satellite systems, video dialtone, etc., would serve to make

domination by the networks and their affiliates even less likely.

B. The Video Programming Production Market

12. Defining the relevant video programming production market

begins by focusing on the products produced by beneficiaries of PTAR.

Entertainment series, news magazine shows, and game shows are examples

of the programs sold by independent producers and syndicators of prime-

time programs to network affiliates and independents. The list can be

extended to include movies (whether for television, theatrical

presentation, or cassette rental), sports programs, talk shows, news

programming (local and national), musical variety, dramas, arts

presentations, etc. Suppliers of these programs include not only those

suppliers that actually are employed in a given year to produce

programming for network prime time but also those producers willing and

able to produce such programming in the event that market price

increased above the competitive level. The list of suppliers will

include television networks, independent syndicators, Hollywood movie

studios, and international video producers. Buyers of such programming

are not limited to television broadcasters but will include other

purchasers of video programming such as cable networks and operators,

direct broadcast satellite operators, videocassette distributers and,

most recently, video programming affiliates of local telephone

companies, which propose to offer video dialtone service. This market

is clearly national and perhaps international in scope, because

[[Page 44775]]

television broadcasters obtain a large portion of their programs from

national providers.

13. There is no evidence in the record that the networks exercise

monopsony or oligopsony power in the video programming production

market, i.e., that one (monopsony) or several firms (oligopsony)

artificially restrict the consumption of programming and depress the

market price paid for programming. Aside from the growth in the

broadcast industry described above, there are nearly 150 national and

regional cable networks, most of which transmit original, non-network

programming. Also, other nonbroadcast video program distributors--such

as cable, wireless cable, and satellite services--have grown. Finally,

first-run syndicators are quite active as buyers (and sellers).

According to the record, in 1994 the video entertainment programming

purchased by each of the three networks accounted for approximately 9.4

percent of aggregate expenditures on video programming in the United

States, after taking into account distribution fees associated with

syndicated programming and home videos. These market shares indicate

that demand for video programming is not concentrated, and that the

networks clearly cannot be said to exercise undue market power in the

video programming production market, either individually or together.

The record also shows that the supply side of the video programming

production market is no more concentrated than the demand side.

14. The Commission therefore concludes that no buyers or sellers,

acting alone or together, are likely to be able to exercise undue

market power in the video programming production market. In addition,

entry barriers are low. In particular, it is unlikely that the three

networks will be able to exercise market power in the video programming

production market, either on the demand or supply side, if PTAR is

repealed.

C. The National Television Advertising Market

15. Several proponents of PTAR argue that the three networks

dominate the television advertising market. But these parties do not

present sufficient evidence to support this argument. Moreover, PTAR

was not adopted to address the structure or performance of the

advertising industry. This is why the Notice did not explicitly seek

information on television advertising markets. The Commission adopted

PTAR due to concerns that the three networks dominated the production

and delivery of television programming. Examination of video

programming distribution and the video programming production market is

thus directly relevant to whether PTAR is necessary under today's

market conditions. The Commission cannot say the same for the

television advertising market, nor are we persuaded that PTAR is the

appropriate mechanism for addressing the networks' role in these

markets.

II. The Costs of PTAR

16. In assessing the continuing need for PTAR, the Commission must

take into account the costs the rule imposes on the networks, their

affiliates, producers of network programming, television viewers, and

the efficient functioning of the market. One obvious cost of the rule

is that it restricts the programming choices of Top 50 Market

Affiliates. They cannot air either network or off-network programming

during the access period. One set of comments describes how the off-

network restriction interferes with the smooth functioning of the

network-affiliate relationship by raising the overall costs of network

broadcasting. With PTAR in place, the affiliate must either make

investments to produce programs itself, or it must purchase first-run

programs from syndicators. In the latter case, the affiliate bears the

transaction costs of establishing relationships with syndicators and

independent programmers. In either case, the affiliate bears the added

risk of how first-run programming will perform relative to known-to-be

popular network reruns. As a result of these higher costs, the total of

net revenues to be shared among networks and affiliates is made smaller

by PTAR.

17. PTAR harms not only networks and affiliates, but the producers

of network programming. The off-network restrictions has had the

unintended effect of discouraging investment in prime-time programming.

Producers rely to a great extent on their ability to sell reruns of

their programs--i.e., off-network programs--to recoup their costs and

to earn a profit. The license fee the networks pay for the right to air

prime-time entertainment programs often does not cover the costs of

producing these programs. The off-network restriction, however,

diminishes producers' ability to recoup unrecovered costs by

artificially restraining the prices of off-network programming. It does

so by eliminating the Top 50 Market Affiliates from the range of

potential purchasers of this programming. By reducing demand, the

prices for off-network shows are reduced. The Commission believes that

PTAR produces costs and inefficiencies to viewers that are larger than

the benefits, if any, of PTAR to viewers.

18. In addition, PTAR as a whole prevents the networks and their

affiliates from taking advantage of network efficiencies during the

access hour. Networks can deliver large audiences to advertisers, which

in turn allows the networks and their affiliates to provide higher cost

programming that is quite popular among audiences during prime time.

While the parties dispute the size of the economic cost due to the loss

of network efficiencies, the Commission concludes that this cost far

exceeds PTAR's economic benefits.

III. Analyzing the Public Interest Need for PTAR

A. Increasing Opportunities for Independent Programmers

19. PTAR's principal purpose was to promote source diversity by

strengthening existing independent television program producers and

encouraging entry of new producers. In adopting PTAR, the Commission

predicted that the rule would increase the net amount of diverse

programming available to the viewing public and induce the entry of new

program suppliers into the market.

20. A number of parties argue that PTAR has failed to promote these

goals. They point out that four companies--Paramount, Warner Brothers,

Fox, and King World--distribute over 95 percent of the first-run

syndicated programming aired during the PTAR access period. Putting

aside the question of who distributes access period programming,

opponents of the rule also argue that PTAR has failed to increase

diversity in terms of who produces such programming. Moreover, the rule

has been criticized for actually lowering program quality and

diversity. Without judging the quality of particular programs, the

Commission agrees that PTAR, by eliminating network programming during

the access hour, may have resulted in the loss of efficiencies that the

networks and their affiliates may have enjoyed in the absence of the

rule. The Commission notes, however that there are many variables that

affect the number of program producers and program types in the market,

with or without PTAR. Nevertheless, we recognize the limits of

regulatory efforts to promote program diversity, and realize that PTAR

prevents the use of network efficiencies during the access hour.

21. Mindful of these issues, the Commission turns to the critical

question of whether PTAR is necessary today as a means of promoting the

[[Page 44776]]

growth of independent programmers and source diversity. In answering

this question, it is important to remember that in adopting PTAR, the

Commission cautioned that it was not its intention to carve out a

competition free haven for syndicators or to smooth the path for

existing syndicators. Rather, the central objective of the rule was to

provide opportunity for the competitive development of alternate

sources of television programs. The Commission no longer believes PTAR

is necessary to provide this opportunity under today's market

conditions. The Commission reached a similar conclusion in eliminating

the fin/syn rules' restriction on network acquisition of financial

interest and syndication rights in network prime time entertainment

programming. In reaching this conclusion, the Commission dealt with the

same source diversity concerns and stated that if profits are

competitive, then the only reason to employ regulatory devices to

protect producer profits is if we determined that, for some reason, the

public required a greater array of producers than the market would

normally bear. As in the fin/syn proceeding, no party has provided any

reasoned justification for such a result here.

22. Repeal of PTAR will subject suppliers of first-run syndicated

programming to greater competition during the access period. This

competition in today's marketplace can provide incentives to provide

more innovative, higher quality programming, all of which benefits the

consumer. Repeal of PTAR will also eliminate the costs generated by the

rule. Most importantly, prices for off-network programming will no

longer be artificially constrained, which we expect will encourage

investment in the production of network programming.

23. Proponents of the rule have not provided any evidence to

support their claims that this competition will destroy the market for

first-run non-network syndicated programming. The record indicates that

first-run programming is often quite popular among audiences, and may

very well be carried by network affiliates during the access hour in

the Top 50 PTAR markets even after repeal of the rule. To the extent

off-network or network programming would displace first-run syndicated

programs from the Top 50 Market Affiliates, first-run programs should

be able to find a place on independent stations, not to mention other

outlets such as cable.

B. Fostering the Growth of Independent Stations and New Networks

24. PTAR provides independent stations greater access to off-

network programming and prevents them from having to compete against

network programming during the access hour. Proponents of PTAR argue

that the rule is necessary to promote the Commission's outlet diversity

goals by fostering the growth of independent stations and new networks.

But the record does not conclusively show that repeal of either the

off-network provision or the network restriction of PTAR will undo the

growth of independent stations since the rule was adopted. Nor will

repeal of the rule likely undermine the development of new broadcast

networks, or otherwise harm the Commission's outlet diversity goals.

25. The number of independent television stations has grown by

almost 450 percent since PTAR was adopted, from 82 stations in 1970 to

over 450 today. The record indicates that advances in television

design, the growth of cable penetration, and the growth in demand for

television advertising all have strengthened independent television.

Independents also have a robust supply of programming to turn to under

today's market conditions. The repeal of PTAR is unlikely to threaten

these advancements. Nor is there sufficient basis in the record to

conclude that repeal will so undermine the ratings and profits of

independent stations that our outlet diversity goals will be

implicated. It is likely that repeal of the rule will subject these

stations to greater competition in acquiring off-network programming

and in attracting audiences during the access hour and prime time. But

there is not sufficient evidence in the record to support the claims

that this competition will result in dramatic ratings declines and

revenue losses to an extent that threatens the overall viability of

independent stations and their ability to satisfy their public interest

obligations. Relatedly, there is no reliable evidence to indicate that

repeal of PTAR will jeopardize the station base of the new networks or

threaten their further development.

26. The Commission consequently concludes that PTAR is not

warranted as a means of ensuring the growth of independent television

stations or new networks. This is especially the case given the costs

of the rule. The off-network provision discourages investment in

network programming. Moreover, it is becoming increasingly inequitable

to provide a competitive advantage to independent stations over network

affiliates in today's marketplace. The networks and their affiliates,

like independents, face growing competition from non-broadcast media.

27. The Commission reaches this conclusion by addressing three

questions raised by the commenters: First, does the record show that

the ``UHF handicap'' warrants affording independent stations a

competitive advantage in the form of PTAR? Second, does the record

demonstrate that PTAR is needed to support independent television

stations' ratings and profitability and that repeal of PTAR would

significantly harm outlet diversity? Third, does the record support the

argument that the repeal of PTAR will frustrate the development of new

networks?

1. The UHF Handicap

28. Proponents of the rule seek to justify PTAR by pointing to the

signal reach disadvantage of UHF stations relative to VHF stations.

They maintain that this ``UHF handicap'' places independent stations at

a structural disadvantage since most of them are in the UHF band.

Affiliates of the three major networks are predominantly VHF stations.

29. The Commission's review of the record, however, as well as

Commission findings in other proceedings, leads it to conclude that the

UHF handicap has been reduced to some extent. First, Congress and the

Commission have taken a number of steps over the years to ameliorate

this handicap by requiring television equipment improvements. Second,

the growth of cable has resulted in a reduction in the UHF handicap

with respect to those viewers that subscribe to cable. However,

although cable has reduced the UHF handicap, the Commission understands

that it may still affect some portion of viewers who are not cable

subscribers.

30. While the UHF disparity continues for some viewers, we do not

think the public interest is served by tying PTAR to its complete

elimination. The rule does not and cannot address the technical

disparities that still exist between some stations. Moreover, the rule

has never been tailored to the UHF/VHF distinction. Rather, PTAR

provides a competitive advantage to independent stations by limiting

the programming options available to Top 50 Market Affiliates, even in

cases where the affected network affiliates are themselves UHF

stations. The Commission does not believe this is appropriate given

today's market

[[Page 44777]]

conditions and the costs imposed by the rule. The handicap has been

reduced. Affiliates, like independents, are facing increased

competition in the television marketplace from non-broadcast sources.

The Commission thus concludes that the UHF handicap that remains does

not warrant continuation of PTAR.

2. PTAR and the Ratings, Growth, and Profitability of Independent

Television Stations

31. The Impact of PTAR on Ratings and Station Growth. Proponents of

the rule rely on a regression analysis set forth in the comments

submitted by the Law and Economics Consulting Group (``the LECG

Study'') to support their claims regarding the importance of PTAR to

independent stations. The LECG analysis attempts to demonstrate that

the adoption of each of the two components of PTAR (the three-hour

network restriction and the off-network restriction) increased the

ratings of independent stations. The same analysis also seeks to show

that repealing PTAR will result in a 58 percent drop in access period

ratings and in a carry-over 67 percent drop in the ratings for the

first (following) prime-time hour for independent television stations.

32. After an extensive review of the LECG Study, the Commission

concludes that the LECG Study, and the arguments advanced by parties

based on this study, do not provide sufficient evidence to demonstrate

that repeal of PTAR will result in significant ratings declines for

independent stations. For the same reasons, the study does not provide

reliable evidence that PTAR has as a historical matter increased

independent station ratings. There are numerous flaws in LECG's

analysis that lead the Commission to this conclusion, including the

following: (1) LECG does not link its econometric model to an

underlying conceptual model of behavior in the television industry; (2)

LECG ignores to problem of hysteresis (i.e., even if PTAR caused

certain changes in the past, there is no guarantee that its elimination

will reverse those changes); (3) LECG's statistical methodology links

changes in independent station's ratings PTAR solely to PTAR, and does

not take into account other regulations that have benefited these

stations; (4) There are errors and gaps in LECG's data sets; (5) There

seem to be problems with LECG's specifications of its equations and

their estimation; and (6) LECG's analysis reports point estimates for

regression coefficients without confidence intervals, making it

impossible to confirm that LECG's predicted ratings decline for

independent stations are statistically distinguishable from zero.

33. The Commission further observes that while independent stations

will be forced to pay competitive prices for off-network programming in

the absence of PTAR, they will not necessarily be outbid for such

programming. In market 51-100, 76 percent of syndicated programs aired

by network affiliates is first-run rather than off-network. Moreover,

in 1993, two of the top five off-network programs broadcast in markets

51-100 were aired more often on independent stations than on

affiliates. It is also unlikely that all network affiliates in a market

will flock to off-network shows, given the incentive to counter-program

with different program formats. In addition, in the event the networks

and their affiliates opt to run network programming during the access

hour, off-network fare will continue to be available to independents.

Finally, in the event an off-network program is displaced from an

independent station, the station can turn to first-run syndicated

programming. First-run programming can generate higher ratings than

off-network shows, with associated carryover ratings benefits.

34. The Commission also notes that the argument advanced in favor

of giving a competitive advantage to independent stations, taken to its

logical conclusion, would suggest that PTAR coverage be redefined so

that it applies to smaller, and less financially secure, markets. Yet

no party has proposed such a result. To the contrary, PTAR's benefits

appear to flow mainly to the stronger independent stations in the

country. In fact, these stations generally have affiliated with one of

the new networks or are part of a jointly owned station group.

According to comments submitted by NBC, there is not a single

independent station in the top 50 markets showing a top-five rated off-

network program that is (1) a UHF station that is (2) not affiliated

with Fox, UPN, or WB, and/or (3) not owned by a company owning three or

more stations. Thus, the impact of repeal of the rule may primarily be

felt by the stronger independent stations. In addition, these stations

participate in joint purchasing or production arrangements that may

ameliorate some of the effects of PTAR's repeal on program prices.

35. Growth in Numbers of Independents. One of the reasons that the

LECG Study and INTV claim as support for the proposition that repeal of

PTAR will substantially hurt UHF independent stations is that the

adoption of PTAR allegedly was responsible for significant growth in

the number of independent stations, albeit not until 5-15 years later.

However, a study submitted by Economics, Inc. (``EI''), shows that

LECG's model can be used to demonstrate that PTAR is not responsible

for the increase in the number of independent stations. Thus, the

Commission cannot conclude that PTAR's adoption caused a significant

increase in the number of independent stations. Nor can the Commission

therefore conclude that PTAR's repeal will cause the large reduction in

the number of independent stations claimed by the rule's proponents.

36. The impact of PTAR on Profits and Programming. Even if the

Commission assumes that PTAR proponents are correct in their prediction

of a ratings decline for independent stations in the event PTAR is

repealed, they have not demonstrated how that would affect independent

stations and the future development of new networks. In particular,

LECG has not provided any convincing estimate of how a decline in

audience share during 1 or 2 hours of prime time, would lead to a large

decline in station revenues and a resulting decline in station profits.

Proponents of the rule have thus not provided any reliable basis to

find that the profits of independent stations would decline

significantly. More importantly, there is no reliable evidence in the

record to support these parties' claims that repeal of the rule will so

affect the financial health of independent stations as to force

stations off the air or undermine their ability to provide public

interest programming, including news and other public affairs

programming.

37. What the record does show is a generally healthy financial

picture for independent stations. Profit data published by the National

Associate of Broadcasters (``NAB'') indicate that the average

independent station has generally been profitable, at least since the

mid-1980s. The average UHF station has been profitable since 1992 after

a number of unprofitable years through the 1980s. This strong financial

picture extends to the independent stations not affiliated with the

largest of the new networks, Fox. These stations reported, on average,

1993 profits of four million dollars per station. UHF non-Fox

affiliated independents reported average annual profits of $1.5 million

per station in 1993. Also, these average profits understate

profitability in the largest markets, those to which PTAR applies.

38. Conclusions. The Commission thus concludes that PTAR, which has

become overly broad and inequitable, is not necessary to provide

independent

[[Page 44778]]

stations a competitive advantage relative to the Top 50 Market

Affiliates. Independent stations may face greater competition in

programming the access hour without PTAR. But there is no reliable

evidence that this will so jeopardize the financial health of

independent stations as to implicate public interest concerns,

particularly those relating to outlet diversity.

3. Repeal of PTAR and New Broadcast Networks

39. According to proponents of PTAR, one of the major reasons why

PTAR has been and continues to be important is that by promoting the

health of independent stations, it has helped create an important and

necessary condition for the development of the new networks--Fox, UPN

and WB. Proponents of the rule argue that repeal will severely harm

independent stations and, in turn, harm the growth of UPN and WB. These

parties, however, have not demonstrated the link between the asserted

harm to independent stations as a result of the repeal of PTAR and the

decreased likelihood of the development of new networks. In their

analysis concerning PTAR and the improving position of those stations

and new networks, PTAR proponents seem to suggest that the

profitability of independent stations has been responsible for the

growth of newly emerging networks, especially the Fox network. However,

it is equally plausible that many affiliates of the Fox network owe

their improved profit position to their affiliation with Fox.

Regardless of the possible importance of both parts of this

interaction, parties favoring continuation of PTAR have not

demonstrated in any convincing way that PTAR itself is ultimately

responsible for the development of newly emerging networks.

40. The Commission does not believe that repeal of PTAR will create

the grounds for failure of newly-launched television networks nor for

significant slowing in their development. Some independent stations may

find their profits reduced as the industry adjusts to this change and

other regulatory and technological changes. However, the Commission

concludes that the prospects for independent stations and new networks

overall are good. First, the Commission believes that the UHF signal

disparity has been reduced, albeit not entirely. This permits

competition for programming on more even terms between similarly

situated UHF and VHF stations, most of which are now network

affiliates. Second, the video programming production market appears to

be open to entry by large and small firms with many producers actively

seeking outlets for their programs. Third, the numbers of independent

stations remain large enough to make it possible for new networks to

add affiliates and expand audience reach. Finally, at the present time,

virtually all categories of television broadcast stations are, on

average, profitable. The repeal of PTAR will reduce costs imposed by

the rule's restrictions on affiliates, network program producers, and

viewers who prefer high-cost programming, and will not create

significant problems for independent stations and new networks.

C. Reducing Network Ability to Dictate Affiliate Programming Choices

41. PTAR prohibits the Top 50 Market Affiliates from obtaining

network-provided programs or off-network programs during the access

period. In 1970, when it adopted PTAR, the Commission concluded that

this was a reasonable method of protecting affiliates against the power

of the networks. Under this reasoning, the affiliates did not have

sufficient bargaining power to refuse to run network programs, even

when doing so was not in their economic self-interest. Thus, although

the rule limited the programming options available to affiliates during

one hour and consequently limited to the same extent the viewing

options available to viewers, nonetheless the affiliates may have

believed they were better off with the rule than without the rule,

given the dominant position of the three networks. The view was that

while a network would dictate one program shown nationally for the

access period, the rule would permit the affiliate to choose instead

from a range of choices (i.e., in-house or independently produced

programs).

42. While advocating repeal of the off-network provision of PTAR,

proponents of the network restriction argue that there are some

indications that the networks continue to have significant bargaining

leverage over their affiliates. Prime time clearance levels are very

high. The record also shows that affiliates rarely preempt prime time

network programming, and that affiliate agreements are often structured

to discourage preemption. In addition, the increase in the number of

independent stations may have increased the demand and competition for

the most lucrative network affiliations. This may therefore reduce, at

least to some degree, the increased leverage the network affiliates

appear to have gained as a result of the emergence of the Fox network.

Moreover, the WB and UPN networks, only recently launched and presently

offering a minimal program schedule, may not yet provide a competitive

alternative to affiliation with one of the other four networks.

43. On balance, however, the Commission does not believe PTAR's

network restriction is the appropriate mechanism under current market

conditions to address the issue of the relative bargaining power

between networks and affiliates. As an initial matter, high clearance

rates do not necessarily indicate undue network leverage; they may

simply reflect the popularity and efficiencies of network programming.

There is also evidence in the record indicating greater affiliate

bargaining power today. The emergence of the Fox network certainly can

be said to have improved affiliate bargaining power by creating a

viable affiliation alternative to ABC, CBS, and NBC. The networks also

point to the fact that the total amount of network programming during

non-prime time dayparts has declined over the years as evidence of the

inability of networks to dictate to affiliates. Finally, there are

today many more options for obtaining programming even without having a

network affiliation.

44. The Commission notes that it is not concerned with the relative

bargaining position of networks and their affiliates to the extent it

merely affects the distribution of profits between the parties. Rather,

the public interest is implicated where network leverage prevents an

affiliate from fulfilling its public interest obligations, such as

broadcasting programming responsive to local interests, or distorts the

normal market incentive to air programming according to viewer

preferences.

45. The Commission thinks these issues are best addressed in the

context of our rules governing a station's right to reject network

programming, the filing of affiliation agreements, and its other rules

regarding the network-affiliate relationship. The Commission has

initiated a comprehensive review of these rules. In doing so, it will

address the issues the parties have raised here, including whether

networks have the capability and the incentive to exercise undue market

or bargaining power in the absence of these rules and the public

interest concerns any such capability and incentive would raise. These

rules, and their corollary rulemaking proceedings, are better tailored

to weigh these public interest issues and strike the appropriate

balance regarding regulation of the network-affiliate relationship.

PTAR, in contrast, is an

[[Page 44779]]

imprecise, indiscriminate response to these concerns.

IV. Summary of Findings and Transition

46. The record shows that the three networks now face greater

competition than they did in 1970. There has been dramatic growth in

the number of independent stations, and broadcasters now must compete

for audiences with the increasing numbers of non-broadcast outlets,

especially cable service. The networks can no longer be viewed as a

funnel through which all television programming must pass. PTAR is thus

not necessary to promote independent program sources, PTAR's primary

goal. The record shows that the large number of video programming

outlets today creates a healthy demand for non-network programs. The

record further shows that there is no public interest reason for

continuing PTAR as a means of providing independent stations or new

broadcast networks a competitive advantage relative to network

affiliates in programming the access hour. Finally, the Commission

finds that PTAR is not an appropriate mechanism for safeguarding

affiliate autonomy. The Commission thus finds that the public interest

does not warrant the continuation of PTAR, especially given the costs

the rule imposes.

47. The Notice sought comment on whether, in the event the

Commission concluded that PTAR should be eliminated, it should repeal

the rule immediately or adopt a transition mechanism that would sunset

the rule after a certain period of time. As noted above, the record

provides strong support for repeal of the rule. A transition

consequently is not necessary to take a ``wait and see'' approach in

order to test, and possibly revisit, the Commission's conclusion to

repeal the rule. The Commission does, however, believe a short

transition period is appropriate to allow industry participants to

adjust to the changing economic conditions that might result from

repeal of PTAR. The PTAR regulatory scheme has been in place for over

two decades, during which time members of the industry have come to

rely on the structure imposed by that scheme. Eliminating that

structure precipitously may have disruptive effects as the marketplace

adjusts to the deregulated environment. A one-year transition will give

parties time to adjust their business plans and contractual

arrangements prior to repeal of the rule and moderate an unnecessarily

abrupt impact on affected stations.

48. The Commission rejects transition proposals that would continue

PTAR for an indefinite or overly long period of time. Such proposals,

if adopted, would impose costs that outweigh any possible benefits of a

longer transition. The record in this proceeding demonstrates that

continuation of the rule in the public interest; prolonging PTAR simply

as a means of continuing to confer competitive benefits on independent

stations therefore cannot be justified.

49. Nor does the Commission believe the scheduled repeal of the

remaining fin/syn rules calls for a longer transition period for PTAR.

A number of the fin/syn rules, including restrictions on network

acquisition of financial interests in prime time programming, were

eliminated over two years ago; the marketplace thus should have had

time to adjust to the elimination of these rules. No party has made a

convincing case that the upcoming planned repeal of the remainder of

these rules will lead to any anticompetitive activities by the networks

or undue disruption of the marketplace so as to warrant postponing PTAR

repeal beyond a year. The Commission also does not believe it is

necessary to take a staggered approach to repeal or schedule a final

review of the rule prior to its scheduled expiration, as it did in the

fin/syn proceeding. The record in this proceeding clearly supports

repeal of PTAR, and the three networks can be said to be facing even

more competition today than they were when the Commission established

its fin/syn transition in 1993. Phased deregulation is less useful when

the transition period is used as a means of minimizing disruption in

repealing a regulation as opposed to taking several cautionary steps in

order to confirm the planned elimination of an entire rule. The

transition plan the Commission has adopted is not motivated by any

uncertainty over its conclusion to repeal PTAR, but rather by a concern

that immediate repeal could be unnecessarily disruptive. The Commission

will thus schedule repeal of the rule in its entirety for August 30,

1996.

50. Other Issues. Given the Commission's conclusion that PTAR no

longer serves the public interest and should be repealed, the

Commission need not address the argument advanced by a number of

parties that the rule is contrary to the First Amendment. The

Commission also does not believe it is appropriate to alter the

definition of ``network'' to include the new networks as urged by some

parties. The Commission is not persuaded that this definition is

inequitable or that it causes new networks to curtail their prime time

offerings in order to evade the application of PTAR. In any event, the

rule will expire in a year and would have little if any impact on an

entity that became a ``network'' during that time period given the

grandfathering provisions presently set forth in the rule. Finally,

given the Commission's decision to repeal the rule, we will not modify

the current exemptions to PTAR as proposed by a number of commenters.

The proposed revisions to the definition of a ``network'' and the

rule's exemptions are not appropriate for the one-year transition the

Commission has established. Indeed, modifying these provisions of the

rule could run directly counter to the purposes of the transition by

creating uncertainty and disruption during a period that is intended to

provide parties time to adjust for repeal of PTAR. The Commission will

consequently retain PTAR in its existing form during the one-year

transition period.

V. Administrative Matters

51. Reason for the Action: This action is taken to repeal the prime

time access rule, 47 C.F.R. Sec. 73.658(k), in response to changes in

the communications marketplace, and to better adjust to the needs of

the public.

52. Objective of this Action: The Commission believes that this

action will remove barriers to competition in the markets for video

programming and enhance program diversity for television viewers. The

rule will be repealed on August 30, 1996, which will give affected

parties time to adjust their business plans and contractual

arrangements in order to avoid an unnecessarily abrupt impact

associated with repeal to viewer and industry structures that have

developed in the 25 years that the subject rule has been in place.

53. Legal Basis: Authority for the actions taken in this Report and

Order may be found in Section 4(i) and 303(r) of the Communications Act

of 1934, as amended, 47 U.S.C. Section 154(i) and 303(r).

54. Any Significant Alternatives Minimizing the Impact on Small

Entities and Consistent with the Stated Objectives: The Commission

determined that, based on the record developed in this proceeding and

existing marketplace conditions, the public interest will be served by

repeal of PTAR. Proponents of retaining the rule failed to establish

that it remains necessary to ensure the diversity of programming

sources and outlets contemplated by adoption of PTAR. Moreover, these

parties have not demonstrated convincingly that PTAR

[[Page 44780]]

itself is ultimately responsible for the development of newly emerging

networks or that repeal of the rule will threaten the station base of

the new networks. Those favoring repeal of the rule established that

the rule unnecessarily limits the programming choices of network-

affiliated stations in the Top 50 television markets and discourages

investment in network programming, without off-setting public interest

benefits.

List of Subjects in 47 CFR Part 73

Radio broadcasting, Television broadcasting.

Rule Changes

Part 73 of Title 47 of the Code of Federal Regulations is amended

as follows:

PART 73--RADIO BROADCAST SERVICES

1. The authority citation for Part 73 continues to read as follows:

Authority: 47 U.S.C. Sections 154, 303, 334.

Sec. 73.658 [Amended]

2. Section 73.658 is amended by removing and reserving paragraph

(k).

Federal Communications Commission.

William F. Caton,

Acting Secretary.

[FR Doc. 95-21319 Filed 8-28-95; 8:45 am]

BILLING CODE 6712-01-M