CBS, ABC Seek FCC Rule Changes

It's not exactly prime-time news: the four major U.S. broadcast networks are going to have to do something about declining market share and rising programming costs.

CBS (CBS) and Walt Disney's (DIS) ABC are petitioning the Federal Communications Commission to repeal the dual network rule, which prohibits mergers between existing English-language broadcast networks. (CBS is a 50 percent owner of CBS.MarketWatch.com.)

The networks are also asking the regulatory body to boost the cap that limits U.S. TV station ownership to 35 percent of the nation's households.

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Analysts and other experts say it isn't going to be easy to budge the FCC.

Fritz Messere, associate professor of communication studies at State University of New York Oswego, says the commission is being pulled in three directions. "No. 1 is that the FCC has to consider what's best for the viewer, but then it has to consider what's best for the industry. And then it has to consider how Congress will weigh that, because it is an extension or an arm of Congress."

In a 44-page brief, CBS last month said dual ownership is vital to the "economic health" of over-the-air networks, given the increasing market share of cable and other video alternatives.

In the 1997-98 TV season, the four largest over-the-air networks had a 59 percent share of the nationwide viewing audience, compared to 90 percent in the 1979-80 season, when Fox had yet to enter the fray. Basic and pay cable had grabbed 42 percent of the audience by last season.

Merrill Lynch analyst Jessica Reif Cohen said the rule blocks what she believes to be a series of logical combinations for CBS, including joint ventures with Viacom's (VIA.B) UPN and Time Warner's (TWX) WB.

Warburg Dillon Read analyst Ed Hatch said the commission will be reluctant to give a gree light to such mergers. "I don't see it happening anytime soon," said Hatch.

The networks also pointed out what they believe to be double standards that exist under current FCC rules.

For one thing, CBS said, "the corporate parents of broadcast networks are free to own highly profitable networks."

CBS itself owns Country Music Television, The Nashville Network and the less-than-profitable CBS Eye On People. Disney owns ESPN, The Disney Channel, partial interests in Arts & Entertainment Network and Comedy Central, and more. General Electric (GE) owns, in addition to top-rated broadcast network NBC, the CNBC financial news channel, MSNBC, a partial interest in Arts & Entertainment Network, and other cable holdings. WB owner Time Warner's vast cable interests include HBO, Cinemax, TBS Superstation, TNT, The Cartoon Network, CNN, and much more.

To underscore their objection, CBS and ABC added that the FCC has no restrictions that would prevent a cable network's owner from buying an over-the-air web.

"Thus," CBS said, "the dual network rule is not only a regulatory anomaly, but irrationally discriminates against broadcasting as opposed to cable ..."

FCC expert Janet Hill Keefer says the fact that broadcasters own so many cable properties refutes their first argument.

"It sort of flies in the face of any argument they could make that competition from cable is hurting them," Keefer huffed.

The broadcasters said another paradox relates to the FCC's regulations about syndication.

Under current rules, any owner of an over-the-air network can own or acquire producers of syndicated material. Many of the major syndicators, like Disney's Buena Vista Television, CBS's Eyemark Entertainment, King World (KWP), Viacom's Paramount Domestic Television, or Sony's Columbia Tri-Star Television, each provide several hours of programming each week to stations across the nation.

The FCC classifies a network as a broadcast entity showing at least four hours of programming on affiliated stations reaching 75 percent of the country.

CBS and ABC argue that if it's all right for them to own syndicators, which produce far more than four hours of programming per week, and also reach at least 75 percent of the U.S. audience, there's no reason why they shouldn't be able to own one of the smaller, "financially struggling" networks, which broadcast for a comparable number of hours.

The networks adopted a similar argument in asking to bump up television station ownership to cover at least 50 percent of U.S. television markets. They said the current 35-percent limit "hinders broadcasters from achieving economic efficiencies."

In addition, CBS and ABC said, the cost savings that can be realized by larger station groups can be spent on news and other types of programming that can benefit local communities.

Keefer isn't sold on it. "In the early days, broadcasting was reserved as what wasupposed to be a mom-and-pop sort of business," she said, "which you'd start in your local community, and you'd serve the local community's needs ... The wholesale mergers in all kinds of media have eroded that enough already."

Hatch thinks the ownership rule will be easier to topple. "They [the FCC] could raise it to 40, 45 percent," Hatch said. "That shouldn't be a problem."

Messere, the New York professor, thinks the big networks will ultimately get their way on dual network ownership - perhaps in one or two years - because they will ultimately find Washington's soft spot: HDTV.

"[The FCC] won't come out and say, 'Yes, the networks are right, they deserve the repeal of the duopoly rule,' because I don't think that's politically possible," Messere said. "But I think they'll go to their liaisons in Congress and say, 'Look, the networks are losing money, we have to find a way to return them to profitability if they're going to provide high-definition programming.'"

The clearer picture and better sound provided by HDTV technology has wowed Congress and the FCC, which has mandated that all U.S. commercial television stations be ready to carry digital broadcasts by 2002.

Messere also said dual network ownership will probably strike Congress as a way to help make sure that sporting events stay on free, over-the-air TV, at least for awhile. Escalating rights fees are making sports a loss leader at many networks.

CBS, Fox, ABC and ESPN recently signed multi-billion dollar NFL contracts, and just this week, ABC and ESPN ponied up a sum estimated in various reports to be around mid-six figures to broadcast National Hockey League games.

"I do not know whether Congress would want to tamper with a market economy, which is a really touchy situation," Messere said, referring to sports costs. "So ... there is an alternative. The alternative is, you give a little more leeway to the networks."

Written By David B. Wilkerson