[Federal Register Volume 60, Number 167 (Tuesday, August 29, 1995)]
[Rules and Regulations]
[Pages 44773-44780]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-21319]
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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
