[Federal Register Volume 65, Number 129 (Wednesday, July 5, 2000)]
[Proposed Rules]
[Pages 41393-41401]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-16820]


=======================================================================
-----------------------------------------------------------------------

FEDERAL COMMUNICATIONS COMMISSION

47 CFR Part 73

[MM Docket No. 00-108; FCC 00-213]


Broadcast Services; Radio Stations, Television Stations

AGENCY: Federal Communications Commission.

ACTION: Proposed rule.

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

SUMMARY: This document proposes to eliminate that section of the 
Commission's rules that that would prohibit affiliation with an entity 
maintaining one of the major television networks (ABC, CBS, Fox, and 
NBC) and the UPN or WB television network. Currently, this rule permits 
a television broadcast station to affiliate with an entity maintaining 
two or more broadcast television networks unless the two or more 
networks consist of two or more of the major networks (i.e., ABC, CBS, 
NBC and Fox) or one of these four networks and either the UPN or WB 
television network. This rule was identified as one that should be 
modified in the Commission's Biennial Review Report.

DATES: Comments are due by September 1, 2000, and reply comments are 
due by October 2, 2000.

ADDRESSES: Federal Communications Commission, 445 12th Street, SW., 
Washington, DC 20554

FOR FURTHER INFORMATION CONTACT: Roger Holberg, Mass Media Bureau, 
Policy and Rules Division, (202) 418-2134 or Dan Bring, Mass Media 
Bureau, Policy and Rules Division, (202) 418-2170.

SUPPLEMENTARY INFORMATION: This is a synopsis of the NPRM in MM Docket 
No. 00-108, FCC 00-213, adopted June 8, 2000, and released June 20, 
2000. The complete text of this NPRM is available for inspection and 
copying during normal business hours in the FCC Reference Center, Room 
CY-A257, 445 12th Street, SW., Washington, DC and may also be purchased 
from the Commission's copy contractor, International Transcription 
Service (202) 857-3800, 445 12th Street, SW., Room CY-B402, Washington, 
D.C. The NPRM is also available on the Internet at the Commission's 
website: http://www.fcc.gov.

Synopsis of Notice of Proposed Rulemaking

I. Introduction

    1. This Notice of Proposed Rulemaking (NPRM) proposes the amendment 
of Section 73.658(g) of the Commission's Rules (47 CFR 73.658(g)), the 
``dual network'' rule applicable to broadcast stations. This rule 
permits a television broadcast station to affiliate with an entity 
maintaining two or more broadcast television networks unless the two or 
more networks consist of two or more of the major networks (i.e., ABC, 
CBS, NBC and Fox) or one of these four networks and either the UPN or 
WB television network. These networks are not explicitly named in the 
rule. However, the statute and legislative history of the 
Telecommunications Act of 1996, which required the Commission to amend 
the dual-network to its current form make it clear that these are the 
networks intended to be described by the legislation. As a result of 
our analysis in our Biennial Review proceeding concerning broadcast 
ownership rules (Biennial Review Report in MM Docket No. 98-35 
(``Biennial Report''), FCC 00-191 (Adopted May 26, 2000; Released June 
20, 2000)), we made a preliminary determination that the current rule, 
as a result of competition, may no longer serve the public interest. 
Accordingly, we indicated that we would commence this rulemaking 
proceeding proposing to amend the rule by eliminating the portion of 
the rule that precludes the ownership of the UPN or WB networks by the 
ABC, NBC, CBS, or Fox television networks.

II. Background

    2. As we noted in the Biennial Review Report, the Commission first 
adopted a dual network rule for broadcast radio networks in 1941 
following an investigation to determine whether the public interest 
required ``special regulations'' for radio stations engaged in chain 
broadcasting (6 FR 2282 (May 6, 1941)). The rule provided that no 
license would be issued to a broadcast station affiliated with a 
network organization that maintained more than one broadcast network. 
The Commission extended the dual network rule to television networks in 
1946 (Amendment of Part 3 of the Commission's Rules, 11 FR 33 (Jan. 1, 
1946)). The Commission believed that permitting an entity to operate 
more than one network might preclude new networks from developing and 
affiliating with desirable stations because those stations might 
already be tied up by the more powerful network entity. In addition, 
the Commission expressed concern that dual networking could give a 
network too much market power. The dual network prohibition, therefore, 
was intended to remove barriers that would inhibit the development of 
new networks, as well to serve the Commission's more general diversity 
and competition goals. The dual network rule for broadcast television 
remained unchanged until 1996, when the Commission amended the rule to 
conform with the provisions in Section 202(e) of the Telecommunications 
Act of 1996 (Public Law 104-104, 110 Stat. 56 (1996)).
    3. Section 73.658(g) sets forth the Commission's current dual 
network rule. It directly reflects the provisions of the Telecom Act 
which permit a television broadcast station to affiliate with a person 
or entity that maintains two or more networks of television broadcast 
stations unless such networks are composed of: (1) Two or more persons 
or entities that were ``networks'' on the date the Telecom Act was 
enacted; or (2) any such network and an English-language program 
distribution service that on the date of the Telecom Act's enactment 
provided 4 or more hours of programming per week on a national basis 
pursuant to network affiliation arrangements with local television 
broadcast stations in markets reaching more than 75 percent of 
television households. Section 202(e) of

[[Page 41394]]

the 1996 Act defines a ``network'' with reference to Sec. 73.3613(a)(1) 
of the Commission's Rules (47 CFR 73.3613(a)(1)). That Rule provides 
that a network is ``any person, entity, or corporation which offers an 
interconnected program service on a regular basis for 15 or more hours 
per week to at least 25 affiliated television licensees in 10 or more 
states; and/or any person, entity, or corporation controlling, 
controlled by, or under common control with such person, entity, or 
corporation.''
    4. The Conference Report stated that the Commission was being 
directed to revise its dual network rule ``to permit a television 
station to affiliate with a person or entity that maintains two or more 
networks unless such dual or multiple networks are composed of (1) two 
or more of the four existing networks (ABC, CBS, NBC, Fox) or, (2) any 
of the four existing networks and one of the two emerging networks 
(WBTN, UPN). The conferees do not intend these limitations to apply if 
such networks are not operated simultaneously, or if there is no 
substantial overlap in the territory served by the group of stations 
comprising each such networks'' (S. Rep. No. 230, 104th Cong., 2d Sess. 
At 163).

III. Discussion

    5. In the Biennial Report we tentatively concluded that we should 
explore modifying the dual network rule by eliminating the prohibition 
on the ownership of either the UPN or WB network by one of the major 
television networks. We stated that neither competition nor diversity 
issues appeared to warrant retention of the rule in its current form.
    6. Our proposal to relax the dual network rule to permit ownership 
of either the UPN or WB network by one of the major networks is based 
on a review of the current economics of the network broadcasting 
industry. The elements of our economic review are briefly summarized in 
the following paragraphs. We seek comment on our view of the current 
economics of network broadcasting both in general and with respect to 
particular conclusions derived from the review.
    7. Framework. The dual network rule, as modified as a consequence 
of the 1996 Act, may be viewed as an anti-merger rule that constrains 
the current organization of the network broadcasting industry. This 
constraint on the organization of the contemporary network broadcasting 
industry may result in organizational inefficiencies that adversely 
affect industry performance, including the type and quality of network 
programming available to viewers. One way to examine the network 
broadcasting industry for possible organizational inefficiencies is the 
application of concepts developed in the transaction cost economics 
(TCE) literature. From a TCE perspective, the economic organization of 
firms and industries reflects specific attributes of the contracting 
process between buyer and seller. The following discussion identifies 
key attributes of critical exchange relationships in the network 
television broadcasting industry, e.g., the relationship between 
program suppliers and broadcast networks, and how these attributes 
contribute to the efficiency or inefficiency of existing industry 
organization. The commercial television network broadcast industry 
today consists of a number of vertically-integrated firms. For example, 
ABC is vertically integrated with Disney as a program supplier; the Fox 
network is vertically integrated with 20th Century Fox as a program 
supplier; and UPN is vertically integrated with Viacom. Thus, an 
economic analysis of the effects of potential mergers between the major 
networks, i.e., ABC, CBS, NBC, and Fox, or potential mergers between 
these entities and an emerging network, i.e., UPN or WB, will in many 
cases involve mergers between vertically-integrated firms. To 
facilitate discussion, the analysis decomposes a hypothetical merger 
between two broadcast networks into two parts. First, we examine the 
relationship between a program supplier and a broadcast network to 
determine whether vertical integration is either more or less efficient 
than simply negotiating an arms-length contractual relationship between 
the program supplier and the broadcast network. The comparative 
assessment of the efficiency of contracting versus vertical integration 
relies extensively on TCE concepts. Second, we assess the effects of a 
horizontal merger between two broadcast networks by relying on 
antitrust measures of market concentration and an analysis of price 
competition in the national market for network television advertising. 
Finally, the gains or losses resulting from the analysis of vertical 
integration are integrated into the measurement of the efficiencies or 
inefficiencies resulting from the horizontal merger to determine the 
overall benefits and costs of a merger between two vertically-
integrated firms. The merger of two vertically-integrated enterprises 
may have both horizontal and vertical economic effects. Horizontal 
effects refer to the economies or diseconomies resulting from enlarging 
the size of the firm post-merger and include effects on consumers, such 
as higher or lower prices and changes in the quantity and quality of 
output produced. These effects can be assessed at each stage of 
production of the vertically-integrated firm. For a television network 
vertically-integrated into the production of network programming, the 
assessment of horizontal effects would include assessing the economies 
or diseconomies of increasing the size of the network and the economies 
or diseconomies of increasing the size and scale of program production, 
assuming that the network that is being acquired is also vertically-
integrated into program production. The effects of the merger of two 
program production enterprises on competition in the network television 
program production market would also be included in the analysis of 
horizontal effects. Growth in the size of the vertically-integrated 
firm post-merger may either accentuate the economies of vertical 
integration post-merger or diminish the efficiencies of vertical 
integration as organizational complexity increases and coordination of 
decisionmaking within the larger firm becomes more difficult and 
costly. Vertical effects refer to the economies or diseconomies of 
integrated production as the size of the vertically-integrated firm 
increases. The analytical framework suggests a way to assess the 
relative significance of some of these horizontal and vertical effects 
that may result from the merger of two television networks that are 
both vertically integrated into the production of network television 
programming.
    8. Standard economic analyses of the effects of a horizontal merger 
of two competing firms, such as two television networks, do not 
ordinarily include an assessment of the effects of the proposed merger 
on the efficiency of vertical integration within the acquiring firm, 
especially if the acquired firm is not vertically integrated. However, 
vertical relationships within the network television broadcasting 
business are endemic in the industry and virtually define its economic 
purpose and industry structure, especially the vertical relationship 
between a television network and its affiliated local broadcast 
stations. Increasingly, television networks, like cable television 
multiple system operators, are vertically integrated into the 
production of programming. Thus, television networks today are 
intrinsically vertically-integrated enterprises and to ignore the 
impact of a horizontal merger

[[Page 41395]]

on the efficiency of such integration is to ignore a critical dimension 
of the economic effects produced by the merger. Consequently, this 
unconventional approach seems appropriate to evaluate more completely 
the economic implications of a potential merger between two television 
networks.
    9. Overview of the Analysis. The application of TCE concepts 
suggests that vertical integration between program suppliers and major 
networks may produce substantial economic efficiencies (compared to 
market contracting) that may benefit both advertisers and viewers. The 
analysis of horizontal mergers between broadcast networks suggests that 
the merger of two major networks would adversely affect competition in 
the national network television advertising market, while the merger of 
a major network and an emerging network may produce efficiencies 
benefiting both viewers and advertisers. Based on the aggregation of 
the costs and benefits from both the vertical and horizontal components 
of a proposed merger, the analysis concludes that the dual network rule 
should be retained as it relates to mergers between the major networks, 
but relaxed to permit mergers between a major network and an emerging 
network.
    10. Attributes of Television Network Output. From an economic 
perspective, firms in the network broadcasting industry, such as ABC, 
NBC, CBS, and Fox, together with their local television station 
affiliates and their owned and operated (O&O) stations, are in the 
business of producing audiences. Access to network television viewers 
is sold to advertisers that want to reach a large, nationwide audience 
of potential customers. Network advertising provides audience reach 
unmatched by any other broadcasting medium. No single cable channel 
today provides the audience reach of any television network. Only 
network television is a mass-distribution venue for programming and 
advertising, notwithstanding the continuing erosion of network 
television audience attributable to the growth of cable and DBS 
viewership. Of the 27 prime time programs viewed in more than ten 
million households during the week of January 17-23, 2000, all 27 were 
aired by either ABC, CBS, NBC or Fox. The largest share for a UPN 
program was approximately 5 million homes and the most popular cable 
program (during any hour) was viewed in just under 5 million homes. 
Access to the mass audience produced by television networks is sold to 
advertisers in terms of thousands of viewers for a defined interval of 
commercial time, such as 30 seconds.
    11. Both a network television program and the over-the-air 
broadcast transmission that delivers the program to viewers have 
economic attributes of a pure public good, i.e., a good or service with 
the property that one individual's viewing of the program does not 
diminish the quantity of the program available for any other individual 
who wishes to view the same program. By contrast, a pure private good, 
such as food, clothing, and many other consumer products and services, 
are ``rivalrous'' in consumption, i.e., a good consumed by one 
individual is not available for consumption by a different individual. 
Thus, a network television program, having the property of a pure 
public good, is not ``used up'' once it is shown. Indeed, the same 
program may be aired repeatedly to the same or different audiences 
without physically ``wearing out'' the program as an asset that 
produces audiences. It is possible, of course, that new audiences for 
the program cannot be found or existing audiences tire of the program 
and will no longer watch it. The program becomes obsolete as an 
audience-producing asset, although the program itself is not physically 
depleted by repeated airings on television.
    12. The public good attributes of a network television program 
imply several things about its cost as an audience-producing asset and 
its market value to the program producer and the network that 
broadcasts the program. First, broadcasting a network program 
represents, in substantial part, a fixed cost of production for the 
network with respect to the number of viewers produced by airing the 
program. Once the program is on the air, the cost of production for the 
network and its station affiliates is insensitive to the number of 
viewers ``consuming'' the program. In other words, the marginal cost of 
adding an additional viewer within the signal coverage area is zero for 
both the network and the station affiliate. This attribute of network 
program costs suggests that large audiences are always preferable to 
smaller ones, since a larger audience costs the network no more to 
produce than a smaller one for the same level of program quality, and 
network revenues derived from advertisers depend directly on the number 
of viewers produced. Expressed differently, the average fixed costs of 
production for the network, i.e., total fixed cost divided by the 
number of viewers, declines as the size of the audience produced 
increases in size. To the extent that such economies are reflected in 
the pricing of network advertising, then the marginal price of network 
advertising per viewer falls as audience size increases. Given the 
fixed cost attributes of network programming assets and the economies 
of spreading such costs over large audiences, economically viable 
television networks must be large rather than small as measured in 
terms of the number of affiliated stations and the viewers produced and 
sold to advertisers.
    13. Second, not only are the costs of network programming fixed, 
they are also sunk. Typically, a sunk cost refers to an investment in 
highly specialized productive assets that cannot be redeployed to an 
alternative use. Sunk cost investments reflect asset-specificity and 
typically have little or no productive value in any other use beyond 
the intended application. While asset-specific investments often 
facilitate reductions in the cost of production or improvements in the 
quality of output produced compared to the use of less specialized 
assets, they involve substantially higher risks of capital recovery 
compared to non-specialized general purpose assets. General purpose 
assets can be redeployed to alternative uses should demand for the 
asset in its original application decline or disappear entirely, while 
asset-specific investments may become worthless. Once created, 
investments in network programming are asset-specific: an action movie 
targeted to a specific audience cannot be redeployed to attract a 
totally different audience that prefers, say, musical comedy. If the 
targeted audience does not like the movie, then much of the investment 
in the movie by the network may be unrecoverable.
    14. Third, the public good and cost characteristics of network 
programs result in a multiplicity of rights that can be sold to 
television networks by program producers. Among these rights are the 
initial network exhibition rights; the right to renew those rights 
(options); and the right to earn revenues from the syndication of a 
successful network program, among other future revenue streams. As a 
result, contract negotiations between a program producer and a network 
for the sale and purchase of program rights are extremely complex, 
involving especially high stakes for the incumbent television networks. 
The growth of cable television and DBS have substantially increased the 
number of viewing options for viewers, resulting in a steady erosion in 
the size of audiences attracted to conventional, over-the-air network 
television programming. Additionally, program producers now have 
expanded

[[Page 41396]]

options for selling their programming beyond the networks or through 
syndication to local television stations. Increasingly, the continuing 
growth in cable networks provides significant competition to the 
incumbent television networks as purchasers of television programs. 
Additionally, some program suppliers, such as Warner Brothers and 
Viacom, have decided to integrate vertically into program distribution 
by creating their own television networks. This option for program 
suppliers introduces additional complexity in the contractual 
relationship between program suppliers and the incumbent television 
networks. As a result of these changes in industry structure over the 
past decade, the contracting environment between and among suppliers of 
network programming and the incumbent networks is both more complicated 
than before and somewhat more risky for the networks. It is imperative 
that networks obtain quality programming to stem audience erosion while 
dealing with suppliers that now have expanded options for the sale of 
their product.
    15. The Market for Network Programming. From the business 
perspective of an incumbent television network, programs are a critical 
input in the process of producing a mass audience. Like any business 
firm, a network faces a ``make or buy'' decision, namely, either make 
the input of production itself or contract with an independent supplier 
to make the input according to specifications established in a 
contract. Prior to the expiration of the Commission's financial 
interest rule in 1995, which prohibited the networks from acquiring 
equity and profit rights in network programming produced by independent 
program suppliers, the Commission forced the network to contract with 
independent program suppliers rather than partially or fully integrate 
vertically with such firms. Following repeal of the Commission's 
financial interest and syndication rules, the networks have partially 
or fully integrated vertically with a number of program suppliers. This 
integration reflects, in part, the difficulties in negotiating a 
contractual relationship with program suppliers. These difficulties 
reflect the peculiar attributes of television network output previously 
described.
    16. The economic complexities of contract negotiation between a 
television network and a program supplier may be illustrated by a 
specific example. Suppose a network wants to contract with a program 
supplier for a prime time program series, say, a situation comedy. Both 
the network and the program supplier may be expected to approach 
contract negotiations from a self-interest maximizing point of view, 
although the inherent uncertainties of creating a successful program 
and forecasting audience acceptance probably makes it impossible to 
know what decisions are profit-maximizing. In the language of TCE, both 
parties approach contact negotiations with bounded rationality, i.e., 
``intendedly rational, but limitedly so.'' As previously discussed, a 
program, or program series, once completed is ``durable'' and can be 
rebroadcast as a network re-run or put in syndication after its network 
run. The economic life of the program or series cannot be known a 
priori, ranging from months to decades. If the program producer 
believes that the planned program may have a long life in syndication, 
then the program producer may be willing to forego front-end profits in 
exchange for the profits expected to be earned in syndication. The 
network, however, may have very different expectations about the 
expected life of the program series and its long-term profitability 
which may pose a fundamental conflict to be resolved through 
negotiation.
    17. If the program series becomes a ``hit'', then the program 
producer may wish to re-open the negotiated contract with the network 
in an effort to obtain a larger share of the anticipated large network 
revenues resulting from the success of the program in attracting 
viewers and advertisers. Since the program producer retains substantial 
control over the creative process that generates the programming, 
including how and when the star talent is utilized in the program, the 
program producer may attempt to ``hold up'' the network by threatening 
to adjust program quality that may benefit the program producer (e.g., 
altering the compensation of key program talent) at the expense of the 
network (e.g., reducing the value of the program as a network re-run). 
In the language of TCE, the program producer may behave 
opportunistically, i.e., ``self-interest seeking with guile.'' With 
respect to other aspects of contract negotiations, the network may also 
behave opportunistically, especially if such behavior is expected of 
the program producer. Moreover, both the network and the program 
producer recognize that attributes of contractual relationship between 
the program producer and the network involve certain external effects, 
i.e., costs or benefits which may accrue to the parties to the contract 
that are largely outside the scope of the immediate transaction. For 
example, should the network suddenly cancel the program series due to 
poor ratings rather than wait to see if the ratings eventually improve, 
the program producer's future revenues derived from its syndication 
rights may be reduced or virtually eliminated. Similarly, the network 
can vary the audience attracted to a network program by positioning the 
program in its program lineup so that it benefits from the audience 
attracted by the program appearing immediately before it. Thus, the 
network's manipulation of its program schedule to achieve its own 
current profit objectives will have a significant effect on the future 
revenues produced by the program in syndication. If the network is 
unable to capture some fraction of these future revenues, it has no 
incentive to consider the external effects of its program schedule 
decisions and may well behave opportunistically toward the program 
supplier's financial interests.
    18. An especially difficult aspect of contract negotiations between 
a network and a program supplier concerns the allocation of the risks 
of program development between the two parties. Given the asset-
specificity of every network program and the significant probability 
that the program will fail to attract an audience of sufficient size to 
attract advertisers, risk allocation between the parties is a difficult 
issue to negotiate, since attitudes toward risk aversion will differ 
between the network and the program producer. The advantages of sharing 
the risks of multiple program production will vary with different 
program producers and networks.
    19. Given the substantial financial risks implied in the production 
and distribution of network programming, both the program supplier and 
the network have a mutual interest in maintaining a mutually 
beneficial, long-term contractual relationship, especially if (1) the 
program purchased is intended as a prime time series; and (2) the 
network and program producer expect to maintain ongoing contractual 
relationships for new programs in the future. Such expectations may, in 
fact, attenuate to some degree the possible incentives to pursue 
opportunistic behavior by either party. Nevertheless, writing a 
contract that resolves inherent conflicts between the parties, 
incorporates the consequences of external effects, discourages 
opportunism, and anticipates many future contingencies in the 
contractual relationship including dispute resolution, is both 
difficult and costly. As suggested by the TCE literature, transactions 
involving substantial asset specificity, uncertainty, and frequency

[[Page 41397]]

may be more efficiently effectuated by some other governance structure 
than contracting by two independent entities. Vertical integration of 
program production and network distribution whereby the former market 
transaction is made internal to the merged firms under unified 
ownership results in a major efficiency gain, namely, the ability to 
adapt more readily the (internal) relationship between the program 
supplier division of the merged enterprise with the network 
distribution division to unanticipated changes in the economic 
environment. As Williamson explains,

The advantage of vertical integration is that adaptations can be 
made in a sequential way without the need to consult, complete, or 
revise interfirm agreements. Where a single ownership entity spans 
both sides of the transaction, a presumption of joint profit 
maximization is warranted. Thus price adjustments in vertically 
integrated enterprises will be more complete than in interfirm 
trading. And, assuming that internal incentives are not misaligned, 
quantity adjustments will be implemented at whatever frequency 
serves to maximize the joint gain to the transaction.

    Based on our analysis of the comparative transaction costs of 
effectuating exchange between program suppliers and television networks 
by market contracting versus vertical integration, we believe that 
partial or complete vertical integration between a broadcast network 
and a program producer may result in substantial efficiencies that may 
benefit network television advertisers and viewers. More specifically, 
advertisers may benefit from reduced rates if the efficiencies of 
vertical integration are reflected in reduced network costs of 
producing a mass audience. Similarly, viewers may benefit from the 
wider availability of diverse programming that a network may produce as 
a result from having available its own program production capability 
that may encourage new but riskier programming possibilities. Once 
fully or partially vertically-integrated into program production, the 
network has full or enlarged claim on revenue opportunities in all 
distribution windows which may enhance the network's incentive to 
invest in innovative programming.
    20. Tendency Toward Network Industry Concentration. As explained 
above, most costs of producing and distributing programming are not 
sensitive to the number of viewers that actually watch a given program 
once broadcast facilities are in place. In effect, a television network 
shares the substantial fixed costs of network television programming 
among the stations either owned by the networks or affiliated with the 
network. Often, a network affiliate shares the fixed costs of network 
programming by giving the network broadcast time which the network then 
sells to network advertisers. In some cases, network affiliates make 
cash payments to networks in addition to broadcast time. The larger the 
number of owned or affiliated stations belonging to a given television 
network, the lower is the average fixed cost of network programming 
that each affiliated station must recover and, all other things 
remaining the same, the lower is the effective price per viewer for an 
advertiser so long as the network faces some competition from other 
television networks. Given the fixed cost nature of the business, 
larger networks, in terms of the number of affiliated stations and 
viewers, tend to be more economically viable than smaller networks.
    21. The number of economically viable television networks is 
presently severely constrained by the number of available local 
affiliates. The number of available station affiliates is constrained, 
in turn, by the amount of spectrum the Commission has allocated to 
broadcast television. A network must have a sufficient number of 
affiliated stations so that (1) a large enough percentage of national 
viewership is achieved so that national advertisers can be attracted, 
and (2) average fixed cost is reduced to a point where the competitive 
price of network advertising will produce network advertising revenues 
sufficient to cover the total cost of network operations. Television 
networks today compete in a national market and need, therefore, an 
affiliated station in most local markets across the country. If 
stations are unavailable in too many local markets, or the available 
stations have poor signal coverage, then the network can neither 
attract sufficient national advertisers nor drive average fixed costs 
low enough such that competitive rates for network advertising will 
cover total network operating costs. Both the fixed cost attributes of 
network costs and the Commission's limited allocation of spectrum to 
broadcast television present obstacles to new broadcast networks.
    22. National Television Advertising Market. Within the national 
television advertising market that includes national spot sales by 
affiliated and independent stations, a strategic group consisting of 
the major networks, i.e., ABC, NBC, CBS, and Fox, can be identified. (A 
strategic group refers to a cluster of independent firms within an 
industry that pursue similar business strategies. For example, the 
major networks supply programming to their affiliated local stations 
that is intended to attract mass audiences and advertisers that want to 
reach such large, nationwide audiences. By contrast, the emerging 
networks target more specialized, niche audiences similar to cable 
television networks. The conceptual basis for a strategic group is 
developed in R. E. Caves and M. E. Porter, ``From Entry Barriers to 
Mobility Barriers: Conjectural Decisions and Contrived Deterrence to 
New Competition,'' Quarterly Journal of Economics 91 (May 1977): 241-
261. Also see Michael E. Porter, Competitive Strategy: Techniques for 
Analyzing Industries and Competition (New York: The Free Press, 1980), 
Chapter 7. For additional references on the application of the 
strategic group concept, see F. M. Scherer and David Ross, Industrial 
Market Structure and Economic Performance, 3rd Edition, (Boston: 
Houghton Mifflin, 1990), pp. 284-85. When properly applied, the concept 
of a strategic group ordinarily implies that only a relatively few 
firms will be included within its boundaries so that competitive 
rivalry will be oligopolistic in nature, although the number of firms 
actually populating the industry aggregated over all strategic groups 
may be quite numerous.) At present, the network firms comprising this 
strategic group provide the greatest reach of any medium of mass 
communications. Since delivering a mass audience is becoming more 
difficult for all media, media that can still produce mass audiences 
become more valuable. As a result, broadcast networks have achieved 
double-digit gains in revenues in recent years despite their loss of 
audience relative to years past. The major mobility barrier impeding 
entry into the major network strategic group is the availability of 
affiliated stations. Notwithstanding some growth in the number of 
stations over the last decade, obtaining sufficient affiliated stations 
remains a major obstacle to developing a new network that can achieve 
sufficient national reach to be attractive to national advertisers.
    23. At present, mobility barriers protecting the major network 
strategic group result in an oligopoly of established networks where 
prices for network advertising will also depend on the number of 
networks. (Mobility barriers are barriers to entry that deter the 
movement of a firm within a given industry from shifting from one 
strategic group to another. Differed strategic groups will be defended 
by different mobility barriers that vary in the effectiveness in 
restricting entry into a

[[Page 41398]]

given strategic group. In general, firms protected by high mobility 
barriers will have greater profit potential than firms in other 
strategic groups protected by low mobility barriers.) In general, as 
the number of independently-owned networks in the strategic group 
decreases, the equilibrium price for network advertising will increase. 
Pricing and output behavior by the major networks may be conceptualized 
as Cournot competition in quantities. In other words, the networks by 
contractual arrangement with their affiliated stations produce capacity 
output at all times, representing the profit-maximizing quantity of 
programming that affiliated stations are expected to ``clear'' over all 
dayparts. As a result, each network in the strategic group is expected 
to maximize profit assuming that the quantity of output produced by its 
rival networks is not affected by its own output decisions.
    24. Economic Effects of Network Mergers. So long as mobility 
barriers deter entry into the major network strategic group, the 
pricing of network advertising will be sensitive to the number of 
network competitors. Thus, horizontal mergers between the major 
networks will increase the unit price of network advertising, all other 
things remaining the same. (The merger may, of course, result in some 
scale economies as the post-merger network increases in size. The 
extent of such possible economies, if any, is not known.) Although 
network advertisers may be harmed by such mergers, viewers of network 
television may benefit if the duplication of similar types of network 
programming is reduced and more programming for specialized audiences 
is offered. Whether the welfare gains to viewers--if any--exceed the 
welfare loss to network advertisers is not known.
    25. Given our analysis of the potential effects of a merger of 
networks in the major networks strategic group, the dual network rule 
as applied to the four major networks should not be relaxed until the 
mobility barriers defending the major network strategic group are 
lowered. An analysis by Commission staff suggests that economic 
concentration within the major network strategic group as measured by 
the Herfindahl-Hirschman Index (HHI) presently exceeds 2600, indicating 
a ``highly concentrated'' market. Any merger between or among the four 
major networks would exceed 100 points, suggesting that such a merger 
would enhance market power or facilitate its exercise. As noted above, 
the major barrier impeding entry into the broadcast networking industry 
is the availability of affiliated stations created by the amount of 
spectrum the Commission allocated to broadcast television. In the near 
future, we expect that deployment of digital television may lower 
barriers to new broadcast networks by enabling broadcast stations to 
carry multiple program streams. Our biennial reviews of the dual 
network rule will enable us to periodically evaluate the impact of DTV 
on existing barriers to new broadcast networks.
    26. While retaining a prohibition on mergers between major 
broadcast networks, we believe a merger between an emerging network, 
such as WB or UPN, and a major network may produce net benefits. Such a 
merger may produce significant efficiencies by internalizing the 
contentious issue of program production risk-sharing within a vertical 
relationship. For example, an emerging network acquired by a major 
network provides the major network with an additional ``window'' for 
the distribution of network programming. In effect, this additional 
window allows the merged network to broadcast the same program in 
different time slots in the same market if both the major and emerging 
networks have affiliates in the same city. Alternatively, if the 
emerging and major network do not have affiliates in the same city, 
then the merged network entity will now reach more households than 
before the merger. In either case, the fixed costs of program 
production are spread over additional viewers in different time slots 
or additional cities. As a result, the effective program cost per 
viewer is reduced in either case. Similarly, a network program that 
fails, or is only marginally successful, on the major network's 
affiliated station might succeed, however, when broadcast to the niche 
audience reached by the affiliates of the emerging network. The risks 
of network program development are clearly attenuated for the merged 
networks as a consequence of reaching additional viewers at different 
times or in additional cities or with audience attributes that may 
differ from the mass audience ordinarily targetted by a major network. 
Moreover, since the emerging networks, such as WB, UPN, or Pax Net are 
not in the major network strategic group, there should be little or no 
adverse effect on the price for network television advertising as a 
result of such a merger. From an economic perspective, the emerging 
networks strategic group would include WB, UPN, Pax Net, Univision, 
Telemundo, and possibly some national syndicators. From a legal 
perspective, the 1996 Act restricted the membership of the emerging 
networks strategic group to include only WB and UPN. Accordingly, we 
are proposing to eliminate that portion of the dual network that would 
prohibit the merger of a network in the major network strategic group 
with the WB or UPN networks.
    27. While we believe that relaxing the dual network rule will 
result in net benefits to both viewers and advertisers as shown by our 
economic analysis, such relaxation of the rule may adversely affect our 
goal of diversity in broadcasting. Clearly, the merger of an emerging 
network with a major network results in the loss of an independent 
network ``voice'' and thus diminishes source diversity. Such a result 
runs counter to the Commission's long-standing goal to foster the entry 
of additional broadcast television networks as a means of promoting 
diversity. So long as substitutes for network television remained 
limited, the entry of additional television networks was crucial to 
increasing viewer choices of diverse television programming. With the 
growth of cable television networks, direct broadcast satellite 
services, and the ongoing deployment of digital television, however, 
encouraging the entry of new, over-the-air broadcast networks may have 
diminished in importance relative to twenty years ago. In other words, 
rivalry between and among direct competitors (i.e., the major 
networks), which still remain relatively few in number even after 
twenty years, has been augmented by the growth of partial substitutes, 
such as cable television and direct broadcast television, supplied by 
firms outside the major networks strategic group. This growth in 
partial substitutes dilutes to some degree the market power of major 
networks relative to their market power in the absence of such 
substitutes. Moreover, our local broadcast ownership rules will 
continue to ensure outlet diversity in local broadcasting markets. In 
short, circumstances may have so changed in broadcast markets that our 
diversity goals may no longer preclude the realization of the 
beneficial effects resulting from the relaxation of the dual network 
rule proposed in this NPRM. We seek comment on the possible effects of 
relaxing the dual network rule on our diversity goals and our tentative 
conclusion that such effects are outweighed by the benefits identified 
in our economic analysis.
    28. We invite comment on any or all aspects of our economic 
analysis of the possible effects of relaxing the dual network rule to 
permit the merger of an emerging network with a major network. In 
particular, we seek comment on (1)

[[Page 41399]]

our analysis of the difficulties of negotiating long term contracts 
between a program supplier and a television network; (2) the likely 
benefits of vertical integration between program producers and networks 
for network advertisers and viewers; (3) our application of the concept 
of a major network strategic group; (4) the likely effects on the price 
of network advertising resulting from (a) a merger of incumbent 
networks within the major network strategic group and (b) a merger of a 
major network and an emerging network; and (5) the effects of the 
merger of an incumbent network and an emerging network on a viewer's 
choice of programming options (mass audience vs. niche audience 
programming) and the likely quality of such program options. Comments 
supplying empirical evidence that is consistent or inconsistent with 
our economic analysis will be especially useful. Theoretical analysis 
that further refines our economic analysis or identifies critical 
weaknesses will also be useful.
    29. We also seek comment on possible merger conditions that might 
help safeguard our broadcast diversity goals while partially relaxing 
the dual network rule to achieve the potential net benefits identified 
in our economic analysis. Are there conditions that could maintain 
separation between the programming decisions of the two networks while 
still allowing them to achieve the efficiencies described in our 
economic analysis?

IV. Administrative Matters

    30. Comments and Reply Comments. Pursuant to Secs. 1.415 and 1.419 
of the Commission's rules, 47 CFR 1.415, 1.419, interested parties may 
file comments on or before September 1, 2000 and reply comments on or 
October 2, 2000. Comments may be filed using the Commission's 
Electronic Comment Filing System (ECFS) or by filing paper copies. See 
Electronic Filing of Documents in Rulemaking Proceedings, 63 FR 24121 
(May 1, 1998).
    31. Comments filed through ECFS can be sent as an electronic file 
via the Internet to http://www.fcc.gov/e-file/ecfs.html. Generally, 
only one copy of an electronic submission must be filed. In completing 
the transmittal screen, commenters should include their full name, 
Postal Service mailing address, and the applicable docket or rulemaking 
number. Parties may also submit an electronic comment via e-mail. To 
get filing instructions for e-mail comments, commenters should send an 
e-mail to [email protected], and should include the following words in the 
body of the message, ``get form your e-mail address>.'' A sample form 
and directions will be sent in reply.
    32. Parties who choose to file by paper must file an original and 
four copies of each filing. All filings must be sent to the 
Commission's Secretary, Magalie Roman Salas, Office of the Secretary, 
Federal Communications Commission, 445 Twelfth Street, SW., TW-A325, 
Washington, DC 20554.
    33. Parties who choose to file paper should also submit their 
comments on diskette. These diskettes should be addressed to: Wanda 
Hardy, Paralegal Specialist, Mass Media Bureau, Policy and Rules 
Division, Federal Communications Commission, 445 Twelfth Street, SW., 
2-C221, Washington, DC 20554. Such a submission should be on a 3.5 inch 
diskette formatted in an IBM compatible format using Word 97 or 
compatible software. The diskette should be accompanied by a cover 
letter and should be submitted in ``read only'' mode. The diskette 
should be clearly labeled with the commenter's name, proceeding 
(including the lead docket number in this case (MM Docket No. 00-108), 
type of pleading (comment or reply comment), date of submission, and 
the name of the electronic file on the diskette. The label should also 
include the following phrase ``Disk Copy--Not an Original.'' Each 
diskette should contain only one party's pleadings, preferably in a 
single electronic file. In addition, commenters must sent diskette 
copies to the Commission's copy contractor, International Transcription 
Service, Inc., 445 Twelfth Street, SW., CY-B402, Washington, DC 20554.
    34. Comments and reply comments will be available for public 
inspection during regular business hours in the FCC Reference Center, 
Federal Communications Commission, 445 Twelfth Street, SW., CY-A257, 
Washington, DC 20554. Persons with disabilities who need assistance in 
the FCC Reference Center may contact Bill Cline at (202) 418-0270, 
(202) 418-2555 TTY, or [email protected]. Comments and reply comments also 
will be available electronically at the Commission's Disabilities 
Issues Task Force web site: www.fcc.gov/dtf. Comments and reply 
comments are available electronically in ASCII text, Word 97, and Adobe 
Acrobat.
    35. This document is available in alternative formats (computer 
diskette, large print, audio cassette, and Braille). Persons who need 
documents in such formats may contact Martha Contee at (202) 4810-0260, 
TTY (202) 418-2555, or [email protected].
    36. Ex Parte Rules. This proceeding will be treated as a ``permit-
but-disclose'' proceeding, subject to the ``permit-but-disclose'' 
requirements under 47 CFR 1.1206(b), as revised. Ex parte presentations 
are permissible if disclosed in accordance with Commission rules, 
except during the Sunshine Agenda period when presentations, ex parte 
or otherwise, are generally prohibited. Persons making oral ex parte 
presentations are reminded that a memorandum summarizing a presentation 
must contain a summary of the substance of the presentation and not 
merely a listing of the subjects discussed. More than a one or two 
sentence description or the views and arguments presented is generally 
required. See 47 CFR 1.1206(b)(2), as revised. Additional rules 
pertaining to oral and written presentations are set forth in 47 CFR 
1.1206(b).
    37. Initial Regulatory Flexibility Analysis. As required by the 
Regulatory Flexibility Act, see 5 U.S.C. 603, the Commission has 
prepared an IRFA of the possible economic impact on small entities of 
the proposals contained in this NPRM. Written public comments are 
requested on the IFRA. In order to fulfill the mandate of the Contract 
with America Advancement Act of 1996 regarding the Final Regulatory 
Flexibility Analysis, we ask a number of questions in our IRFA 
regarding the prevalence of small businesses in the television 
broadcasting industry. Comments on the IRFA must be filed in accordance 
with the same filing deadlines as comments on the NPRM, and must have a 
distinct heading designating them as a response to the IRFA. The 
Reference Information Center, Consumer Information Bureau, will send a 
copy of this NPRM, including the IRFA, to the Chief Counsel for 
Advocacy of the Small Business Administration.
    38. As required by the Regulatory Flexibility Act (``RFA'') (5 
U.S.C. 601 et seq.), the Commission has prepared this present Initial 
Regulatory Flexibility Analysis (IRFA) of the possible significant 
economic impact on small entities by the policies and rules proposed in 
this NPRM. Written public comments are requested on this IRFA. Comments 
must be identified as responses to the IRFA and must be filed by the 
deadlines for comments on the NPRM provided above. The Commission will 
send a copy of the NPRM, including this IRFA, to the Chief Counsel for 
Advocacy of the Small Business Administration. See 5 U.S.C. 603(a). In 
addition, the NPRM and the IRFA (or summaries thereof) will be 
published in the Federal Register.

[[Page 41400]]

A. Need for, and Objectives of, the Proposed Rules
    39. Section 202(h) of the Telecom Act requires the Commission to 
review its broadcast ownership rules every two years, beginning in 
1998, and to ``determine whether any of such rules are necessary in the 
public interest as the result of competition.'' It instructs the 
Commission to repeal or modify any regulation it determines to be no 
longer in the public interest. In its first Biennial Report, issued as 
a result of Section 202(h) of the Telecom Act, the Commission 
determined that the dual network rule, as it currently exists, appeared 
to no longer be in the public interest. Accordingly, in compliance with 
the provisions of Section 202(h) of the Telecom Act, the Commission is 
commencing this proceeding in order to modify Sec. 73.658(g).
B. Legal Basis
    40. This NPRM is adopted pursuant to sections 1, 2(a), 4(i), 303, 
307, 309, 310, of the Communications Act, 47 U.S.C. 151, 152(a), 
154(i), 303, 307, 309, 310, and Section 202(h) of the 
Telecommunications Act of 1996.
C. Description and Estimate of the Number of Small Entities To Which 
the Proposed Rules Will Apply
    41. The RFA directs agencies to provide a description of, and, 
where feasible, an estimate of the number of small entities that may be 
affected by the proposed rules, if adopted. The Regulatory Flexibility 
Act defines the term ``small entity as having the same meaning as the 
terms ``small business,'' ``small organization,'' and ``small business 
concern'' under section 3 of the Small Business Act. A small business 
concern is one which: (1) Is independently owned and operated; (2) is 
not dominant in its field of operation; and (3) satisfies any 
additional criteria established by the SBA.
    42. Pursuant to 5 U.S.C. 601(3), the statutory definition of a 
small business applies ``unless an agency after consultation with the 
Office of Advocacy of the SBA and after opportunity for public comment, 
establishes one or more definitions of such term which are appropriate 
to the activities of the agency and publishes such definition(s) in the 
Federal Register. A ``small organization'' is generally ``any not-for-
profit enterprise which is independently owned and operated and is not 
dominant in its field.'' Nationwide, as of 1992, there were 
approximately 275,801 small organizations. ``Small governmental 
jurisdiction'' generally means ``governments of cities, counties, 
towns, townships, villages, school districts, or special districts with 
a population of less than 50,000.'' As of 1992, there were 
approximately 85,006 such jurisdictions in the United States. This 
number includes 38,978 counties, cities, and towns; of these, 37,566, 
or 96 percent, have populations of fewer than 50,000. Thus, of the 
85,006 governmental entities, we estimate that 81,600 (91 percent) are 
small entities.
    43. Small TV Broadcast Stations. The SBA defines small television 
broadcasting stations as television broadcasting stations with $10.5 
million or less in annual receipts. According to Commission staff 
review of the BIA Publications, Inc., Master Access Television Analyzer 
Database, fewer than 800 commercial TV broadcast stations (65%) subject 
to our proposal have revenues of less than $10.5 million dollars. We 
note, however, that under SBA's definition, revenues of affiliates that 
are not television stations should be aggregated with the television 
station revenues in determining whether a concern is small. Therefore, 
our estimate may overstate the number of small entities since the 
revenue figure on which it is based does not include or aggregate 
revenues from non-television affiliated companies. It would appear that 
there would be no more than 800 entities affected.
D. Description of Projected Reporting, Recordkeeping, and Other 
Compliance Requirements
    44. Currently, Sec. 73.3613 of the Commission's rules requires TV 
broadcast licensees to file network affiliation contracts. The NPRM 
proposes no change to that requirement or any new recordkeeping or 
other compliance requirements.
E. Significant Alternatives Considered Steps Taken To Minimize 
Significant Impact on Small Entities, and Significant Alternatives 
Considered
    45. The RFA requires an agency to describe any significant 
alternatives that it has considered in reaching its proposed approach, 
which may include the following four alternatives: (1) The 
establishment of differing compliance or reporting requirements or 
timetables that take into account the resources available to small 
entities; (2) the clarification, consolidation, or simplification of 
compliance or reporting requirements under the rule for small entities; 
(3) the use of performance, rather than design, standards; and (4) an 
exemption from coverage of the rule, or any part thereof, for small 
entities.
    46. As indicated above, the NPRM proposes to allow licensees to 
affiliate with a network entity that maintains two or more networks 
unless such multiple networks consist of more than one of the ``big 
four'' networks (NBC, ABC, CBS and Fox). This would eliminate the bar 
on affiliation with an entity that maintains one of the ``big four'' 
networks and the UPN and/or WB networks. All significant alternatives, 
i.e., retention of the existing rule, modification of the existing 
rule, and elimination of the dual network rule altogether, were 
recently considered in the Commission's 1998 biennial review of its 
broadcast ownership rules (MM Docket No. 98-35). In that proceeding the 
Commission tentatively determined that elimination of the subject 
provision would be in the public interest. The Commission considered 
the results of this top-to-bottom review of the subject rule in its 
consideration of alternatives to the course proposed herein in the 
instant proceeding. The proposed action will provide television 
licensees, including those considered to be ``small businesses,'' to 
have increased flexibility with regard to the broadcast networks with 
which they may affiliate.
F. Federal Rules That May Duplicate, Overlap, or Conflict With the 
Proposed Rules
    47. None.
    48. Initial Paperwork Reduction Act Analysis. This NPRM proposes no 
new information collection requirements.
    49. Additional Information. For additional information on this 
proceeding, please contact Roger Holberg, Policy and Rules Division, 
Mass Media Bureau, (202) 418-2130, or Dan Bring (202) 418-2164, (202) 
418-1169 TTY.

V. Ordering Clauses

    50. Accordingly, pursuant to the authority contained in sections 1, 
2(a), 4(i), 303, 307, 309, and 310 of the Communications Act, as 
amended, 47 U.S.C. 151, 152(a), 154(i), 303, 307, 309, and 310, and 
Section 202(h) of the Telecommunications Act of 1996, this Notice of 
    51. Proposed Rulemaking is adopted.
    52. The Commission's Consumer Information Bureau, Reference 
Information Center, shall send a copy of this NPRM, including the 
Initial Regulatory Flexibility Analysis, to the Chief Counsel for 
Advocacy of the Small Business Administration.

List of Subjects in 47 CFR Part 73

    Radio, television broadcasting.


[[Page 41401]]


Federal Communications Commission.
Magalie Roman Salas,
Secretary.
[FR Doc. 00-16820 Filed 7-3-00; 8:45 am]
BILLING CODE 6712-01-U