“Pros And Cons Of Top-Four Network Rule In The Digital Age” by TLP’s Gregg Skall and Ashley Brydone-Jack, published in Law360

Pros And Cons Of Top-Four Network Rule In The Digital Age

By Gregg Skall and Ashley Brydone-Jack

Law360 (August 30, 2023)

Television viewing has changed drastically in the last decade. Consumers are increasingly cutting the cord and abandoning traditional methods of content consumption, such as cable and over- the-air television, in favor of online streaming platforms that allow viewers to choose what and when they want to watch.

This evolution has changed the delivery of information and entertainment in America and upended the pre-digital age movie theater and appointment television revenue models.

 

Gregg Skall
Ashley Brydone-Jack

This is highlighted by the Writers Guild of America and SAG-AFTRA labor strikes where both groups are demanding increases in base pay and residuals in the streaming TV era, plus assurances that their work will not be replaced by artificial intelligence.

Yet, despite this major shift in consumption, television stations largely failed to adapt and many argue that is due to regulatory restrictions.

Local television broadcasters are arguing to the Federal Communications Commission that existing ownership restrictions are too confining in an age where they face robust competition from new digital media.

 

Telecommunications Act of 1996 and the Quadrennial Review

Indeed, Congress has mandated that the FCC address such issues on a regular basis. In 1996, Congress adopted the most significant overhaul of telecommunications regulation since the adoption of the Communications Act of 1934.

The Telecommunications Act [1] was intended to increase competition in all sectors of communications, including broadcasting. Strong floor statements acknowledged the rapid convergence of telecommunications technologies that would bring along new competition.[2]

To ensure that broadcasting would remain competitive in a complicated, fast-changing telecommunications marketplace, Congress empowered the FCC to periodically review its broadcasting ownership rules.[3]

Specifically, Section 202(h) of the Telecommunications Act directs the FCC to review its media ownership rules every four years and to repeal or modify any rule that is no longer “necessary in the public interest as the result of competition.”[4]

Despite this mandate, the commission rarely made changes to its broadcast ownership rules for more than 25 years. And the few changes it made resulted in lengthy legal challenges that either overturned the FCC’s decision or delayed implementation.[5]

The FCC currently has two quadrennial review proceedings open: 2018[6] and 2022.[7] In both proceedings, the FCC has sought comment on whether its broadcasting multiple ownership regulations remain “necessary in the public interest as the result of competition,”[8] specifically seeking comment on three rules: the Local Radio Ownership Rule,[9] the Local Television Ownership Rule[10] and the Dual Network Rule.[11]

In the course of the proceeding, the Dual Network Rule, also known as top-four network rule, has risen to the top of the list as a primary point of concern for many television broadcasters.

The Top-Four Network Rule

The top-four network rule currently in effect was first adopted in 2003 during the commission’s 2002 biennial review.[12] The rule permits an entity to own two television stations licensed in the same designated market area[13] provided that one of the stations is not ranked among the top four stations in the designated market area.[14]

This effectively prohibits common ownership of any two stations affiliated with one of the big four broadcast television networks: ABC, CBS, Fox and NBC.[15]

At the time the rule was adopted, the FCC reasoned that allowing common ownership of two of the top-four ranked stations in a designated market area would not serve the public interest for two main reasons.

First, the FCC concluded that joint ownership of two of the top stations would likely cause a decrease in unique local programming.[16] Second, the FCC found that permitting joint ownership of top four stations would “reduce incentives to improve programming that appeals to mass audiences” by reducing the amount of competition in the market.[17]

The FCC also perceived additional competitive concerns including that the networks could act as a strategic group in advertising.[18] Consequently, the FCC determined that joint ownership of two top-four stations would not serve the public interest.

In the past 20 years, however, the TV marketplace has changed drastically. Television broadcasters are faced with pressures from personal use technologies not imagined when the multiple ownership rules were adopted.

Not surprisingly, many broadcasters have urged the commission to remove the top-four prohibition in some or all markets. But, other interested parties argue the rule is necessary to preserve competition and diversity.

Changing FCC Rules To Match The Television Market

Many broadcasters argue that the FCC’s original reasons for adopting the top-four ownership prohibition are no longer relevant, and that rule changes are necessary to allow basic laws of economics to function properly.

First, some broadcasters point out that direct competition from digital advertising is now well established, which contradicts the FCC’s original concern that the big four networks are a strategic group with regard to local advertising.[19]

For example, a 2019 U.S. Department of Justice workshop on competition in television and digital advertising underscored the increased competition from digital media, and broadcaster panelists emphasized the need for broadcaster consolidation to provide local service to their communities.[20]

Panelists explained that digital companies, successful with national advertising, had developed and were deploying new algorithms that allowed digital advertisers to geographically tailor their ads to local markets, resulting in greater revenue flowing to digital advertising, and away from traditional advertising mediums.

Speakers and commenters emphasized that regulators needed to expand their market definition to cover all advertising, including digital advertising, in addition to television, radio and newspapers.[21]

And, the increase in digital advertising to the detriment of local broadcasters has continued. A 2021 BIA Advisory Services report focusing on just Google search and the Facebook newsfeed estimated that local broadcasters lose almost $2 billion annually to these platforms.[22]

The Benton Institute for Broadband & Society concluded that this “competitive imbalance threatens their continued investment in local journalism.”[23] The current television marketplace simply is significantly different from the one in 2003 when the top-four network rule was initially adopted.

Second, broadcasters have emphasized that the top-four prohibition is actually hindering local news and programming. Quality local news programming is expensive and increasingly harder to fund as a result of the decrease in advertising.[24]

A recent editorial from Harry Jessell, editor of the television industry newsletter TVNewsCheck, provides an interesting view on how the current rule operates counterproductively and will lead to out-of-market consolidation with reduced local service.[25]

Indeed, many stations have opted to air regional programming from sister stations in other larger markets instead of local programming because the cost of maintaining a local news team and studio is too great.

Broadcasters argue that relaxing the top-four prohibition on joint ownership would help increase local programming by local broadcasters. A BIA study[26] found that consolidation in the smallest markets results in economies of scale when high fixed costs are spread across multiple stations and an increase in local news production, not a decrease.

Finally, broadcasters argue that lack of programming options is no longer a concern given the increased competition from video streaming.[27] In July 2022, streaming was for the first time the largest source of television viewing in the U.S., outranking both broadcast and cable viewers.[28]

While some streaming services offer the same content as broadcasters, such as Hulu or Paramount+, which offer next day streaming of shows that aired on television the night before, these services also have been developing and airing their own television shows that compete directly with those offered by broadcasters.

Indeed, in 2022, the big four networks collectively garnered 86 Emmy nominations, which is less than the totals of HBO and its streaming service Max and Netflix individually, and no single network managed to earn more nominations than several of the other large streaming platforms Hulu, Apple TV+, Disney+ and Prime Video.[29]

Thus, while broadcast television might once have been the predominant source of video entertainment, the advent and success of streaming services suggests that consolidation among top-four stations is unlikely to decrease the overall quality of programming.

The increase in online commentators also mitigates the concern that eliminating the top- four rule would allow the voice of the networks to dominate the video marketplace.

A Special Case for Small Market, Local Owners

There also have been advocates for modifying rather than eliminating the rule. In 2010, a coalition of smaller market television stations submitted a study concluding that allowing mergers in smaller markets increases diversity.[30] Similarly, Heritage Broadcasting Co. of Michigan[31] urges the commission to relax the local television ownership rules for small group owners in small markets to preserve meaningful local service.[32]

Heritage argues that large national television broadcasters have been able to garner additional revenue by marketing their national footprint; a resource unavailable to small market, locally owned licensees. Heritage would define markets below the top 100 and with five or fewer commercial television stations as small and “small group owners” as those who have stations in 18 or fewer television markets.

Heritage submitted a study by professor Kent Collins, then professor emeritus of the Missouri School of Journalism,[33] concluding that the proposed change would improve the depth and quality of television journalism in small markets and provide a better foundation for maintaining a democracy as envisioned by the First Amendment to the U.S. Constitution.

Arguments Against Removing the Top-Four Prohibition

On the other hand, many commenters have urged the commission to retain the top-four rule citing concerns over competition, local programming and diversity.

For example, the Media and Democracy Project argues that a top-four rule change would harm competition and that FCC and Federal Trade Commission overlapping jurisdiction require interagency consideration before making a change.[34]

A group of academics from the University of Minnesota, Seattle University and Elon University[35] urged the FCC to keep the current local ownership restrictions stating that past consolidation has allowed local broadcasters to become too large and to stop offering unique local content.

Citing Gray Television’s takeover of the West Palm Beach-Fort Pierce market, they believe past changes that have allowed consolidation have decreased local programming.

The National Association of Black Owned Broadcasters[36] has raised concerns that each incident of consolidation allowed by changes in the law or regulation, including Congress’ repeal of the tax certificate policy, the Supreme Court’s 1995 Adarand Constructors Inc. v. Peña decision and Congress’ passage of the Telecommunications Act, has resulted in decreased Black ownership.

Similarly, a group called The Leadership Conference on Civil and Human Rights,[37] contends it is crucial that station licensees reflect the communities they serve, and that media mergers have been steadily increasing, while rates of ownership diversity remain unacceptably low.

Conclusion

There clearly is a hot debate on the record over the merits and demerits of the top-four rule. The issue has been pending for quite some time and deserves to be resolved. When that will happen is uncertain.

Given the number of contentious arguments that have been advanced on many aspects of the issue, it may not be able to be resolved until the confirmation of a fifth commissioner. That may be soon.

A confirmation vote on the nomination of Democrat Anna Gomez to fill the fifth commission seat has been paired with new terms for Republican Brendan Carr and Democrat Geoffrey Stark.

In the past, pairings of this sort have had some success in causing the confirmation process to proceed. If that is the case here, FCC Chairwoman Jessica Rosenworcel will enjoy her first working majority since she took over as agency head.

Gregg Skall is a member and Ashley Brydone-Jack is an associate at Telecommunications Law Professionals PLLC.

The opinions expressed are those of the author(s) and do not necessarily reflect the views of their employer, its clients, or Portfolio Media Inc., or any of its or their respective affiliates. This article is for general information purposes and is not intended to be and should not be taken as legal advice.

[1] Telecommunications Act of 1996, Pub. L. No 104-104, 110 Stat. 56 (1996).

[2] See: Statement of Senator Strom Thurmond, 1995 WL 263653 (1995)

[3] See: Statement of Senator Robert Byrd, 141 Cong. Rec. S7492-01, 1995 WL 317148 (1995); Telecommunications Act of 1996, § 202(h).

[4] Telecommunications Act of 1996, § 202(h). Initially, the FCC was required to review its rules biennially. In 2004, the statute was amended to require that the FCC conduct its review every four years, as the FCC had been unable to timely conclude its review on a biennial basis to that point. See Consolidated Appropriations Act, 2004, Pub. L. No. 108- 199 § 629, 118 Stat. 3, 99–100 (2004).

[5] See, e.g. Prometheus Radio Project v. FCC, 141 S. Ct. 1150 (2021); Prometheus Radio Project v. FCC, 824 F.3d 33 (3d Cir. 2016); Prometheus Radio Project v. FCC, 652 F.3d 431 (3d. Circ. 2011); Prometheus Radio Project v. FCC, 373 F.3d 372 (3d Cir. 2004).

[6] The 2018 Quadrennial Review was initiated on December 13, 2018, one year after the 2010/2014 Quadrennial Review was concluded and while that proceeding was on appeal. See 2018 Quadrennial Regulatory Review, MB 18-349, Notice of Proposed Rulemaking, 33 FCC Rcd 12111 (2018). After the Supreme Court’s Prometheus decision was released, Prometheus Radio Project v. FCC, 141 S. Ct. 1150 (2021), the FCC released a Public Notice seeking to refresh the record. See 2018 Quadrennial Regulatory Review, MB 18-349, Public Notice, 36 FCC Rcd 9363 (2021) (“2018 Quadrennial Public Notice”). No order has been adopted concluding the proceeding as of the date of this article.

[7] 2022 Quadrennial Review, MB Docket NO. 22-459, Public Notice, DA 22-1364 (Dec. 22, 2022) (“2022 Quadrennial Public Notice”).

[8] 2022 Quadrennial Public Notice at 1; see also 2018 Quadrennial Public Notice at 4.

[9] 47 CFR § 73.3555(a).

[10] Id. § 73.3555(b).

[11] Id. § 73.658(g).

[12] 2002 Biennial Regulatory Review, MB Docket 02-277, Report and Order and Notice of Proposed Rulemaking.

[13] A Designated Marketing Area, or DMA, is a geographic area where residents can receive the same local TV and radio stations.

[14] 47 CFR 73.3555(b)(1)(ii)

[15] See, 47 CFR 73.3555 at Note 11 and FCC Consumer Guide at: https://www.fcc.gov/consumers/guides/fccs-review-broadcast-ownership-rules 18 FCC Rcd 13620, para. 186 (2003).

[16] Id. at para. 198.

[17] Id. at para. 199

[18] Id at para. 196.

[19] See e.g. Comments of Fox Corporation, NBCUniversal Media, LLC, and Paramount Global, MB Docket No. 22-459, at 6 (filed Mar. 3, 2023); Reply Comments of the National Association of Broadcasters, MB Docket No. 18-349, at 52 (filed Oct. 1, 2021); Comments of Heritage Broadcasting of Michigan, MB Docket No. 18-349, at 5-6 (filed Sept. 2, 2021).

[20] See Public Workshop on Competition in Television and Digital Advertising, Department of Justice, https://www.justice.gov/atr/events/public-workshop-competition-television-and- digital-advertising (May 2-3, 2019) (DOJ Competition in Advertising Workshop).

[21]  NetChoice Comments to Department of Justice Workshop: Competition in Television and Digital Advertising Workshop Information, (Jun. 14, 2019) available at: https://www.justice.gov/atr/page/file/1201406/download.

[22] “Economic Impact of Big Tech Platforms on the Viability of Local Broadcast News,” BIA Advisory Services, 2021 Available at: https://www.benton.org/headlines/economic-impact- big-tech-platforms-viability-local-broadcast-news.

[23] Id at ii.

[24] Comments of the National Association of Broadcasters, MB Docket No. 18-349 at 29-20 (filed Sep. 2, 2021).

[25] Harry A. Jessell, FCC Nixes Another Deal with Deafening Silence, TVNewsCheck, (Jul. 6, 2023, 5:30 AM ET) https://tvnewscheck.com/regulation/article/fcc-nixes-another-deal- with-deafening-silence/.

[26] The Impact on the Amount of New Programming From Consolidation in the Local Television Station Industry, Mark Fratrick, PhD, SVP/Chief Economist, BIA Advisory Services, September 23,

[27] Comments of the National Association of Broadcasters, MB Docket No. 18-349 at 87-88 (filed Sep. 2, 2021).

[28] Streaming Claims Largest Piece of TV Viewing Pie in July, Nielson (Aug. 2022), https://www.nielsen.com/insights/2022/streaming-claims-largest-piece-of-tv- viewing-pie-in-july/.

[29] Scott Feinberg, Emmys: Why Do Broadcast Networks Want to Air Their Own Funeral?, The Hollywood Reporter (July 25, 2022), https://www.hollywoodreporter.com/tv/tv- features/emmys-2022-telecast-broadcast-networks-1235182979/.

[30] Matthew Spitzer, “Television Mergers and Diversity in Small Markets,” Journal of Competition Law and Economics (2010).

[31] In the interest of full disclosure, Heritage is a client of the authors; law firm.

[32] Comments of Heritage Broadcasting of Michigan, MB Docket No. 18-349 (filed Sept. 2, 2021).

[33] See: https://journalism.missouri.edu/2019/04/professor-emeritus-receives- distinguished-service-to-broadcast-journalism-award/.

[34] Comments of the Media and Democracy Project, MB Docket No. 22-459 (filed Mar. 20, 2023).

[35] Reply Comments of Christopher Terry, Caitlin Ring Carlson, and J. Israel Balderas, MB Docket No. 22-459 (filed Mar. 20, 2023).

[36] Comments of the National Association of Black Owned Broadcasters Inc., MB Docket No. 22-459 and 18-349 (filed Mar. 3, 2023).

[37] Comments of the Leadership Conference on Civil and Human Rights, MB Docket 22-459 (filed Mar. 20, 2023).

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