Broadcast Services; Network/Affiliate Rule; Advertising

FEDERAL COMMUNICATIONS COMMISSION

47 CFR Part 73

[MM Docket No. 95-90; FCC 95-226]

Broadcast Services; Network/Affiliate Rule; Advertising

AGENCY: Federal Communications Commission.

ACTION: Notice of proposed rulemaking.

-----------------------------------------------------------------------

SUMMARY: This Notice of Proposed Rulemaking proposes to re-examine the

Commission's rules prohibiting a broadcast television licensee from

entering into agreements with a network that limits the licensee's

ability to alter its advertising rates and from being represented for

the sale of advertising by a network with which it is affiliated. This

action is needed to determine if the costs of these rules exceed their

benefits.

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

by September 27, 1995.

ADDRESSES: Federal Communications Commission, Washington, DC 20554.

FOR FURTHER INFORMATION CONTACT:

Paul Gordon (202-776-1653) or Tracy Waldon (202-739-0769), Mass Media

Bureau.

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

of Proposed Rule Making in MM Docket No. 95-90, adopted June 14, 1995

and released June 14, 1995. The complete text of this NPRM is available

for inspection and copying during normal business hours in the FCC

Reference Center (Room 239), 1919 M Street, N.W. Washington, D.C., and

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

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

N.W., Suite 140, Washington, DC 20037.

Synopsis of Notice of Proposed Rule Making

. The complete text of this NPRM is available

for inspection and copying during normal business hours in the FCC

Reference Center (Room 239), 1919 M Street, N.W. Washington, D.C., and

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

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

N.W., Suite 140, Washington, DC 20037.

Synopsis of Notice of Proposed Rule Making

1. With this Notice of Proposed Rule Making (NPRM), the Commission

continues its reexamination of the rules regulating broadcast

television network/affiliate relationships in light of changes in the

video marketplace. This NPRM takes a fresh look at 47 CFR 73.658 (h)

and (i) (the Commission's ``network control of station advertising

rates'' rule and the ``network advertising representation'' rule,

respectively). Section 73.658(h) prohibits agreements by which a

network can influence or control the rates its affiliates set for the

sale of their non-network broadcast time, and Section 73.658(i)

prohibits broadcast television affiliates that are not owned by their

networks from being represented by their networks for the sale of non-

network advertising time. Both rules address station relationships with

any broadcast television network, i.e., any organization that provides

and identical program to be broadcast simultaneously by two or more

stations.

2. In reconsidering these rules, our central focus is on whether

they continue to effectively serve this Commission's cornerstone

interests of promoting diversity and competition. In this NPRM, after

first reviewing the initial premises for these rules, we will look at

the changes in the competitive environment over the years since the

rules were adopted, and we will consider the current marketplace in

which they operate. We will inquire whether networks would have the

capability and the incentive to exercise undue market or bargaining

power in the absence of these rules and will examine public interest

3

e initial premises for these rules, we will look at

the changes in the competitive environment over the years since the

rules were adopted, and we will consider the current marketplace in

which they operate. We will inquire whether networks would have the

capability and the incentive to exercise undue market or bargaining

power in the absence of these rules and will examine public interest

3. The network rules governing control of station rates and network

advertising representation were originally adopted to protect the

ability of affiliates to serve as viable, independent sources of

programming, and to foster competition in the provision of advertising.

As the Commission stated in 1941, ``[c]ompetition between stations in

the same community inures to the public good because only by attracting

and holding listeners can a broadcast station successfully compete for

advertisers. Competition for advertisers[,] which means competition for

listeners[,] necessarily results in rivalry between stations to

broadcast programs calculated to attract and hold listeners, which

necessarily results in the improvement of the quality of their program

service. This is the essence of the American system of

broadcasting.''\1\ The Commission still believes, fifty years later,

that healthy and vigorously competitive television advertising markets

are in the public interest.

\1\Report on Chain Broadcasting, Commission Order No. 37; Docket

5060, at 47, quoting Spartanburg Advertising Co., Docket No. 5451,

(January 9, 1940).

---------------------------------------------------------------------------

broadcasting.''\1\ The Commission still believes, fifty years later,

that healthy and vigorously competitive television advertising markets

are in the public interest.

\1\Report on Chain Broadcasting, Commission Order No. 37; Docket

5060, at 47, quoting Spartanburg Advertising Co., Docket No. 5451,

(January 9, 1940).

---------------------------------------------------------------------------

4. Having discussed why network influence over national spot

advertising rates implicates our public interest concerns, we turn to

the practical questions of whether networks, under current market

conditions, have the ability to exercise this influence, and whether

they would choose to exercise it. The first question asks the degree to

which a network could pressure its affiliates to act in a manner that

benefits the network, but which may not be in the best interests of

either the public or the licensee. The second question asks whether a

network, even if it had such power, would have any incentive to

exercise it. Finally, we request comment on whether the existing rules

effectively perform their functions and whether elimination or

modification of the rules would serve the public interest.

5. The public interest may be harmed if networks possess sufficient

bargaining power over their affiliates such that exercise of this

bargaining power would result in reductions of affiliate advertising

revenues significant enough to inhibit the affiliate's ability to

present programming that best serves its community. In order to assess

whether networks today have a substantial degree of bargaining power

with respect to their affiliates, we must define the relevant

alternatives available to the two parties. To the extent that an

affiliate has alternative opportunities to affiliate with a given

network, network bargaining power could be reduced. In the same manner,

it is also presumed that the more potential affiliates in a market, the

more bargaining power the network will have.

6

ing power

with respect to their affiliates, we must define the relevant

alternatives available to the two parties. To the extent that an

affiliate has alternative opportunities to affiliate with a given

network, network bargaining power could be reduced. In the same manner,

it is also presumed that the more potential affiliates in a market, the

more bargaining power the network will have.

6. We ask parties to comment on whether, and if so the extent to

which, the balance of bargaining power has shifted toward affiliates in

the years since these advertising rules were promulgated, and what

effect the current balance of bargaining power has on our related

public interest concerns of diversity and competition.

7. Even if a network has undue bargaining power over its

affiliates, it may not have the incentive or ability to exercise that

bargaining power to influence national video advertising rates in a way

that would harm the public interest. Presumably, a network would find

it in its interest to manipulate the national spot advertising rates of

its affiliates only if it could earn higher profits by doing so.

Whether a network could profit form this activity depends on the

availability of other sources of advertising time to which advertisers

can turn that are ``reasonably interchangeable'' with network

advertising time. Understanding the goals of advertisers and the role

of the national advertising representatives is critical in determining

whether national spot advertisements are reasonably

o.

Whether a network could profit form this activity depends on the

availability of other sources of advertising time to which advertisers

can turn that are ``reasonably interchangeable'' with network

advertising time. Understanding the goals of advertisers and the role

of the national advertising representatives is critical in determining

whether national spot advertisements are reasonably

interchangeable substitutes for network advertisements. We must also

consider whether there are products, in addition to national spot

advertisements, that might substitute for broadcast television network

advertising. If these other products provide competitive alternatives

to network and national spot advertisements, the ability of a network

to adversely influence rates in the national video advertising market

will be substantially diminished.

8. In this regard, we propose to use the same analytical framework

as in our pending television ownership proceeding.\2\ In that item, we

sought comment on whether the advertising time supplied by broadcast

television networks, program syndicators, cable networks, and perhaps

cable multiple system operators were reasonably interchangeable. We

noted that the amounts of advertising time sold by other suppliers,

such as direct broadcast satellite, wireless cable, or video dialtone

program providers, were too small to have an appreciable effect on

national broadcast advertising.

\2\Further Notice of Proposed Rule Making in MM Docket 91-221,

60 FR 6490 (Feb 2, 1995).

---------------------------------------------------------------------------

hat the amounts of advertising time sold by other suppliers,

such as direct broadcast satellite, wireless cable, or video dialtone

program providers, were too small to have an appreciable effect on

national broadcast advertising.

\2\Further Notice of Proposed Rule Making in MM Docket 91-221,

60 FR 6490 (Feb 2, 1995).

---------------------------------------------------------------------------

9. The Report on Chain Broadcasting argued that a network would

exert pressure on its affiliates to raise their national spot ad rates

so as to make network ads more attractive to advertisers, and thus more

profitable. In this way, the network's profits would increase at the

expense of its affiliates' profits. The 1980 Network Inquiry Report\3\

argued that a network and its affiliates together had incentives to

manipulate the network and national spot advertising rates so that all

parties' profits increased. Under either of these scenarios, if

networks or networks and their affiliates together have the incentive

and the market power to manipulate national video advertising rates to

their advantage, the Commission's goals of diversity and competition

could be adversely affected in the absence of the rules.

\3\Network Inquiry Special Staff, New Television Networks:

Entry, Jurisdiction, Ownership and Regulation, Final Report,

(October 1990).

---------------------------------------------------------------------------

power to manipulate national video advertising rates to

their advantage, the Commission's goals of diversity and competition

could be adversely affected in the absence of the rules.

\3\Network Inquiry Special Staff, New Television Networks:

Entry, Jurisdiction, Ownership and Regulation, Final Report,

(October 1990).

---------------------------------------------------------------------------

10. The ability of a network or a network and its affiliates to

influence national video advertising rates depends again upon the

availability of reasonably interchangeable substitutes. If we were to

conclude on the basis of the record that each network's advertising

time competes vigorously with: (1) the advertising time of the other

networks; (2) the advertising time for national spot ads sold by

affiliates and independent stations; and (3) advertising time offered

by syndicators and cable networks, then networks, either with or

without their affiliates, will likely be unable to affect prices

significantly in the national video advertising market. Under this

scenario, if a network, or a network and its affiliates, were to

attempt to raise their advertising rates above competitive levels,

national advertisers would have several alternative suppliers to go to,

and they would likely switch their patronage to these alternatives. We

request comment on the ability of advertisers to switch to these

alternative advertising providers and the resulting effect on station

revenues. Commenters should focus on the degree to which these

potential and actual competitors limit the ability of a network and/or

its affiliates from profitably raising national television advertising

rates above competitive levels.

11

e alternatives. We

request comment on the ability of advertisers to switch to these

alternative advertising providers and the resulting effect on station

revenues. Commenters should focus on the degree to which these

potential and actual competitors limit the ability of a network and/or

its affiliates from profitably raising national television advertising

rates above competitive levels.

11. Alternatively, if we were to conclude on the basis of the

record that networks face few competitors in the national video

advertising market other than each other and broadcast television

stations (through national spot sales), we must still determine whether

a network, or a network and its affiliates, could affect national

television advertising rates in a manner that should concern us.

Including only these competitors in the relevant market, we seek

comment on whether any network, or a network and its affiliates acting

in concert, could adversely affect national video advertising rates.

12. Finally, the record that we develop in this proceeding may

indicate that network and national spot advertisements do not compete

for the same advertisers. Should that be the case, changes in the rates

for national spot advertisements will likely have no impact on the

demand for network advertising and, consequently, no impact on network

advertising rates. Such a finding would lead us to question the

continued need for our advertising rules. We seek comment on what basis

if any exists that would support retention of our advertising rules if

we determine that network advertising time and national spot

advertising time do not compete with each other for the same

advertisers.

13. We also seek comment and information on the nature and extent

of the services currently provided by national television advertising

representatives

ules. We seek comment on what basis

if any exists that would support retention of our advertising rules if

we determine that network advertising time and national spot

advertising time do not compete with each other for the same

advertisers.

13. We also seek comment and information on the nature and extent

of the services currently provided by national television advertising

representatives. If general industry practice is for a television

licensee to instruct the representative what rates to charge (leaving

the latter no discretion to alter them), we question what harm there

would be in allowing networks to represent their affiliates. On the

other hand, licensees might generally provide their representatives a

range of rates within which to charge advertisers, thereby giving the

representatives some latitude in managing the stations' transactions.

We ask whether this would facilitate the adverse consequences in the

national television advertising market and the resulting public

interest concerns that were previously discussed.

14. Finally, we must address the question of whether our rules

effectively prevent the harms they were designed to redress. Can

networks currently influence national spot advertising rates

indirectly, by using mechanisms other than possible influence or

control over affiliates' rates? For example, since a network currently

can control the amount of national spot time its affiliates have

available to sell during network programming, does this allow the

network indirectly to control the affiliates' national spot rates? If

we find that networks, with or without their affiliates, can easily

circumvent the advertising rules, then eliminating those rules would

appear to cause no additional harm.

15

etwork currently

can control the amount of national spot time its affiliates have

available to sell during network programming, does this allow the

network indirectly to control the affiliates' national spot rates? If

we find that networks, with or without their affiliates, can easily

circumvent the advertising rules, then eliminating those rules would

appear to cause no additional harm.

15. Whether we repeal, modify, or retain the prohibitions on

network control of station advertising rates and network representation

of affiliates in the advertising market depends on the nature of the

competitive advertising interrelationships among the various video

program providers. Should the record indicate that neither television

broadcast networks nor networks and their affiliates have the ability

or incentive to manipulate the market price for network or national

spot television advertising time, we would consider eliminating or

modifying the rules if the record indicates that they are ineffective

in correcting the public interest harm they were designed to remedy. On

the other hand, should we determine that networks, or networks and

their affiliates, have the ability and incentive to manipulate the

market price for network or national spot television advertising time,

and that these rules effectively address any resulting public interest

harm, we would consider retaining the rules.

16. However, the record might indicate that we should eliminate one

rule, but not the other. For example, we might determine on the basis

of the record established that networks, acting as station advertising

representatives, in fact have no influence over national spot rates of

the stations they represent. If these representatives have no ability

to affect their clients' rates, we would likely be inclined to

eliminate the rule prohibiting network representation of affiliates in

the national spot advertising market, even though we may wish to

Reference Center (Room 239), 1919 M Street, N.W., Washington, D.C.

20554.

18. This is a non-restricted notice and comment rulemaking

proceeding. Ex parte presentations are permitted, except during the

Sunshine Agenda period, provided they are disclosed as provided in the

Commission Rules. See generally 47 CFR Sec. Sec. 1.1202, 1.1203, and

1.1206(a).

Initial Regulatory Flexibility Analysis

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

and update the Commission's Rules concerning network control of station

advertising rates and affiliate advertising representation by networks

in light of changes in the video programming industry.

20. Objective of this Action: This Notice is intended to reexamine

the Commission's rules regulating broadcast television stations' sale

of advertising.

21. 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 and 303.

22. Recording, Recordkeeping, and Other Compliance Requirements

Inherent in the Proposed Rule: None.

23. Federal Rules that Overlap, Duplicate, or Conflict with the

Proposed Rules: None

24. 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 decision.

25. Any Significant Alternatives Minimizing the Impact on Small

Entities and Consistent with the Stated Objectives: The proposals

contained in this NPRM are intended to simplify and ease the regulatory

burden currently placed on commercial television broadcasters.

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

the Commission has prepared the above 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

intended to simplify and ease the regulatory

burden currently placed on commercial television broadcasters.

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

the Commission has prepared the above 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 this Notice of

Proposed Rule Making, but they must have a separate and distinct

heading designating them as responses to IRFA. 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).

27. This Notice of Proposed Rule Making is issued pursuant to

authority contained in Sections 4(i) and 303 of the Communications Act

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

List of Subjects 47 CFR Part 73

Television broadcasting.

Federal Communications Commission.

William F. Caton,

Acting Secretary.

[FR Doc. 95-16374 Filed 7-3-95; 8:45 am]

BILLING CODE 6712-01-M