[Federal Register Volume 66, Number 115 (Thursday, June 14, 2001)]
[Rules and Regulations]
[Pages 32242-32248]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-14936]


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FEDERAL COMMUNICATIONS COMMISSION

47 CFR Part 73

[MM Docket No. 00-108; FCC 01-133]
RIN 4211


Broadcast Services; Radio Stations, Television Stations

AGENCY: Federal Communications Commission.

ACTION: Final rule.

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SUMMARY: This document amends the Commission's ``dual network'' rule. 
That rule effectively prevented mergers among the four major television 
broadcast networks (ABC, CBS, Fox and NBC) or between one of the four 
major networks and the UPN and/or the WB television networks. The 
action taken eliminates that portion of the rule that effectively 
prevents mergers between a major television network and the UPN and/or 
WB television networks.

DATES: Effective August 13, 2001.

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

FOR FURTHER INFORMATION CONTACT: Roger Holberg or Danny Bring, Mass 
Media Bureau, Policy and Rules Division, (202) 418-2120.

SUPPLEMENTARY INFORMATION: This is a synopsis of the Report and Order 
(R&O) in MM Docket No. 00-108, FCC 01-133, adopted April 19, 2001, and 
released May 15, 2001. The complete text of this document 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, DC. This R&O is also available on the 
Internet at the Commission's website: http://www.fcc.gov.

Synopsis of Report and Order

I. Introduction

    1. In this R&O we amend Sec. 73.658(g), the ``dual network'' rule, 
to permit one of the four major television networks--ABC, CBS, Fox and 
NBC--to own, operate, maintain or control the UPN and/or the WB 
television network. The rule already permits any of the four major 
television networks to own any television network created subsequent to 
the date that the Telecommunications Act of 1996 was enacted. By this 
action, we recognize that the economics of the broadcast television 
network industry have changed to the point that retention of the rule 
in its current form is no longer in the public interest.

II. Background

    2. The dual network rule goes back some sixty years. The Commission 
first adopted a dual network rule in 1941, following its investigation 
of ``chain'' broadcasting. The rule adopted then mandated a flat 
prohibition on an entity maintaining more than a single radio network. 
As we noted in the Notice of Proposed Rule Making (``NPRM'') in this 
proceeding (65 FR 41393 (July 5, 2000)), when the Commission extended 
the rule to television networks in 1946, it determined that permitting 
an entity to operate more than one network might preclude new networks 
from developing and affiliating with desirable stations.
    3. Title 47 CFR 73.658(g) sets forth the current version of the 
dual network rule. It reflects the provisions of section 202(e) of the 
1996 Act. That section directed the Commission to modify its dual 
network rule to prohibit a television station from affiliating with any 
entity that owns more than one of the four major networks (ABC, CBS, 
Fox, or NBC) or one of the four major networks and an emerging English-
language network which, on the date of the 1996 Act's enactment, 
``provides 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 homes. * * *'' The legislative history of this provision 
indicated that it was intended to apply to only the UPN and WB 
television networks. Moreover, these two networks were the only two 
entities other than the four major networks that met this definition of 
a network on the relevant date. (Both UPN and WB argue that they did 
not meet the legislative definition of a network for these purposes. We 
rejected UPN's argument in this regard in considering the Viacom/CBS 
merger. We need not reach the merits of The WB Network's argument in 
this regard given our resolution herein, which renders its argument 
moot.)
    4. The current dual network rule differs markedly from the dual 
network rule that existed from 1946 to 1996. The

[[Page 32243]]

earlier rule prohibited a broadcast station from affiliating with a 
network organization that maintained more than one broadcast network. 
As such, the old rule effectively prevented network organizations from 
creating a new broadcast network or merging with an existing broadcast 
network. In contrast, the current dual network rule permits a broadcast 
station to affiliate with a network organization that maintains more 
than one broadcast network. Such affiliation is prohibited, however, if 
the multiple network combination is created by a merger among ABC, CBS, 
Fox, or NBC, or a merger between one of these four networks and UPN or 
WB. While the current rule gives all network organizations the 
opportunity to pursue any economic efficiencies that may arise from the 
maintenance of multiple broadcast networks, it restricts the manner in 
which specific network organizations become multiple broadcast 
networks. The current rule facilitates the maintenance of multiple 
broadcast networks created through internal growth and new entry. A 
broadcast network may develop multiple broadcast networks by creating 
new broadcast networks from scratch, or acquiring video networks from 
nonbroadcast media (e.g., cable or satellite) and moving them to 
broadcast. In addition, the current rule facilitates the creation of 
multiple broadcast networks by permitting (1) mergers between a 
broadcast network created before the 1996 Act (i.e., ABC, CBS, FOX, 
NBC, UPN, and WB) and broadcast networks created subsequent to the 1996 
Act (e.g., PAXtv); (2) mergers between broadcast networks created 
subsequent to the 1996 Act; and (3) a merger between UPN and WB.
    5. Section 202(h) of the 1996 Act also requires the Commission to 
review its broadcast ownership rules, including rules such as the 
instant rule that were amended pursuant to Section 202, every two years 
beginning in 1998 and to ``repeal or modify any regulation it 
determines to be no longer in the public interest.'' In our first 
biennial review proceeding we examined, among other broadcast ownership 
rules, the dual network rule. Section 202(h) requires us to determine 
whether any of these rules remained ``necessary in the public interest 
as the result of competition.'' As a result of our analysis according 
to that standard we tentatively determined that the component of the 
dual network rule that currently prevents the UPN or WB networks from 
being owned by one of the four major networks may no longer be 
necessary in the public interest as a result of competition
    6. As a result of the findings made in the Biennial Review Report, 
we issued the NPRM initiating the instant proceeding. In the NPRM, we 
analyzed the dual network rule pursuant to a framework that involved 
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. We stated that application of TCE concepts 
suggests that vertical integration between program suppliers and major 
networks may produce substantial economic efficiencies that might 
benefit both advertisers and viewers. We also stated that horizontal 
mergers between a major network and an emerging network may produce 
efficiencies that might benefit both advertisers and viewers. Moreover, 
we found that there should be little or no adverse effect on the price 
for network advertising as the result of such a merger. Therefore, we 
proposed to eliminate the major network/emerging network merger 
prohibition from our dual network rule.

III. Discussion

    7. In this R&O, we consider our proposal to relax the dual network 
rule by eliminating the restriction on mergers between the top 4 
broadcast networks and UPN or WB. Our focus, pursuant to section 
202(h), is whether this aspect of the rule remains ``necessary in the 
public interest as the result of competition.'' Accordingly, we first 
identify several competitive changes and trends in the video services 
market that we consider relevant to the continued necessity for the 
rule. We then apply the framework, developed in the NPRM, for analyzing 
both the vertical and horizontal competitive impacts of the potential 
combinations that are currently prohibited by the rule. After 
addressing the impact of the rule on competition, we turn to the 
impacts of maintaining or changing the rule on diversity, the other 
primary public interest concern. Weighing these factors, we decide, as 
proposed in the NPRM, to eliminate that portion of the rule that 
effectively prohibits mergers between UPN or WB and one of the four 
major networks. We conclude that this change will not harm, and indeed 
is likely to promote, both competitive efficiency and diversity. 
Although some commenters also urged us to go beyond the tentative 
conclusions of the Biennial Review Report and the NPRM and to eliminate 
the dual network rule in its entirety, we note that the questions 
presented in the NPRM related solely to the emerging networks portion 
of the rule. We therefore decline to eliminate the dual network rule in 
its entirety at this time, finding that more information and analysis 
would be necessary to address the more complex issues that action would 
involve.
    8. Marketplace Developments. Since the enactment of the 1996 Act, 
significant changes have occurred to the competitive environment in 
which networks, including emerging networks, operate. These changes, 
which have occurred both within the television broadcast industry and 
throughout the multichannel video programming distribution (``MVPD'') 
industry, have substantial implications for both the competition and 
diversity concerns that underpin the dual network rule. We will first 
detail some of these developments and then turn to an analysis of the 
components of the rule in light of these changes.
    9. Within the broadcast industry, the number of commercial and 
noncommercial television stations has increased from 1550 in August 
1996 to 1663 as of September 2000. This represents an increase of over 
7% in 4 years. During roughly the same time, prime time viewership 
among the top six broadcast networks declined from 71% in 1996 to 58% 
in 2000. Thus, within the last 4 years, there has been both a small but 
significant increase in the number of television broadcast outlets 
available to viewers (and potentially to new broadcast networks such as 
PAXtv) and a substantial decrease in the dominance of broadcast 
networks in terms of viewership.
    10. Accompanying, and largely causing, the reduction in broadcast 
network viewership during the last 4 years has been the steady 
expansion of the cable industry. At the end of 1995, the cable industry 
had a penetration rate of 67.8% of homes passed. By 2000, the 
penetration rate had grown slightly to 69.7%. While this represents 
only an incremental increase in penetration, the increase is 
significant when viewed in connection with the increase in channel 
capacity on cable networks. As of October 1995, 15.6% of cable systems 
offered 54 or more channels of video programming, and 63.8% of cable 
systems offered between 30 and 53 channels, indicating that 79.4% of 
systems provided 30 or more channels of programming. In 2000, the 
number of high capacity cable systems was significantly higher. By 
2000, 24.2% of cable systems offered 54 or more channels of 
programming. With the percentage of cable systems offering 30-53 
channels virtually unchanged since 1996, the increase in high capacity 
cable

[[Page 32244]]

systems means that in 2000 86.6% of cable systems offered 30 or more 
channels of programming to subscribers. We anticipate that channel 
capacity on cable systems will continue to expand as more cable systems 
adopt digital technology.
    11. Because each additional channel of capacity on a cable system 
represents a distinct avenue that may be used to deliver video 
programming, the increase in channel capacity provides video 
programming producers a greater opportunity to distribute their 
programming to consumers. Many cable networks have been formed to take 
advantage of this opportunity, and, as a whole, they appear to have 
been successful in capturing a significant portion of viewers over the 
last 4 years. In 1996, there were 162 cable programming services; by 
2000, the number had increased to 214. In 1996, cable networks had a 
30% full-day audience share; in 2000, cable networks' share was 45.5%. 
As channel capacity grows, we expect that new cable networks will be 
formed and the reach of existing cable networks will be extended.
    12. Perhaps the most significant competitive change over the last 4 
years has been the rapid growth of the Direct Broadcast Satellite 
(``DBS'') industry. When the 1996 Act was enacted, DBS service had been 
available to consumers for less than 2 years. Although the DBS industry 
had garnered 3.82 million subscribers by October 1996, this represented 
only 5% of MVPD subscribers, and many of these subscribers were located 
in rural areas not served by cable. DBS also suffered from certain 
competitive disadvantages, such as the inability to offer subscribers 
access to local broadcast signals via the satellite signal. Over the 
last 4 years, the industry has significantly matured. By 2000, the DBS 
industry had almost 13 million subscribers, representing more than 15% 
of MVPD households. Moreover, bolstered in part by the new statutory 
right to provide ``local-into-local'' broadcast service, DBS has grown 
from a predominantly rural service to a viable alternative to cable in 
all parts of the country.
    13. The growth of the DBS industry since 1996 significantly affects 
the opportunities available to network programming producers and 
consumers. Currently, the two operating DBS providers, DirecTV and 
EchoStar, each offer subscribers access to hundreds of channels of 
video programming. As with a cable channel, each DBS channel provides 
an independent avenue through which producers of video programming can 
distribute, and viewers may access, video programming. Although a 
certain number of DBS channels are used to provide the same network 
programming found on cable channels, a DBS operator could choose, 
except where must carry obligations are involved, to provide regional 
or local programming in response to market demand.

A. Competition

    14. Mergers Between A Major Network and UPN or WB. The developments 
in the broadcast, cable, and DBS industry have had a significant effect 
on the competitive landscape in which broadcast networks operate. Where 
almost 84 percent of households subscribe to an MVPD service, and as 
television broadcast stations and MVPDs, because of the increase in the 
number of available channels, seek a greater number of attractive 
programs to offer their viewers, new opportunities are created for 
producers to obtain distribution channels. Moreover, non-broadcast 
networks, whose niche programming can provide advertisers with more 
focused demographics, may continue to erode the audience share of 
broadcast networks and compete for advertising revenue, especially with 
the emerging networks. While we cannot definitively predict how these 
competitive forces will play out, we believe that competitive 
developments since the enactment of the 1996 Act have diminished the 
importance of obtaining broadcast affiliates to establish a successful 
video programming network. We believe that these developments require 
us to consider whether the dual network rule should be modified.
    15. As discussed above, markets for video services have broadened 
and grown, reflecting shifts in market demand and supply in recent 
years. Competitive rivalry between and among suppliers of video 
services has intensified as consumers find increased choice of video 
programming and new vendors that supply video programming and video 
delivery services. Increased competitive rivalry intensifies the 
pressure on management to (1) improve internal operating efficiency by 
using inputs of production more effectively and organizing the firm to 
reduce redundancy in staffing or business functions; and (2) reorganize 
the firm through horizontal and vertical mergers to achieve economies 
of scale and scope. We focus here on the effect our rules may have on 
the networks' ability to achieve economic efficiencies through vertical 
and horizontal integration. As explained in the NPRM, TCE provides a 
conceptual framework for assessing possible gains and losses in 
organizational efficiency that may result from the intensified pressure 
on firm management to improve operating efficiency induced by the 
greater competitive rivalry confronting the firm.
    16. In the NPRM, the Commission noted that the commercial 
television broadcast network industry today consists of a number of 
vertically-integrated firms. For example, ABC (a broadcast network) is 
vertically integrated with Disney (a program supplier), Fox (a 
broadcast network) is vertically integrated with 20th Century Fox (a 
program supplier), UPN (a broadcast network) is vertically integrated 
with Viacom (a program supplier), and WB (a broadcast network) is 
vertically integrated with AOL Time Warner (a program supplier). In 
addition to these well-know examples, NBC produces programs through NBC 
Studios and CBS produces programs through CBS Enterprises (formerly 
Eyemark Entertainment and King World Productions). Because mergers 
between broadcast networks may involve mergers between vertically-
integrated firms, the Commission examined and sought comment on (1) the 
potential efficiencies of vertical integration between a program 
supplier and a broadcast network and (2) the effects of a horizontal 
merger between two broadcast networks.
    17. Our analysis of the economic effects of the dual network rule 
decomposes a hypothetical merger between two vertically-integrated 
broadcast networks into two parts. First, the relationship between a 
program supplier and a broadcast network is examined 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 on 
TCE concepts. Second, the effects of a horizontal merger between two 
broadcast networks is assessed by relying on measures of market 
concentration and an analysis of price competition in the national 
market for network television advertising. Finally, the economic gains 
or losses resulting from the analysis of vertical integration are 
combined with the expected economic gains or losses resulting from the 
horizontal merger to determine the overall benefits and costs of a 
merger between two vertically-integrated firms.
    18. As explained in the NPRM, our economic analysis focuses on the 
contemporary contracting environment between television networks and

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program producers. We have concluded that specific attributes of 
television network output and the complexities of contract negotiations 
between a television network and a program supplier tend to favor the 
replacement of market contracting with a vertical organizational 
relationship between the network and the program supplier. Applying TCE 
concepts, we further conclude that this substitution of vertical 
integration for a contractual relationship is most likely an 
economically-efficient response to the hazards of market contracting 
rather than the exercise of market power by the television network. 
Thus, the vertical integration of program suppliers and television 
networks (1) reflects competitive pressures induced by more intense 
competition for viewers that now enjoy greatly expanded video 
programming choices compared to a decade ago; and (2) minimizes 
transaction costs by eliminating the costly adverse effects of 
negotiating contractual relationships between the programmers and the 
networks. We conclude that the merger of a program supplier with a 
broadcast network would result in transaction efficiencies compared to 
a contractual relationship between the network and the program 
supplier. Given the growing competition for viewers of video 
programming, we anticipate that the efficiencies of vertical 
integration between the programming assets of an emerging network and a 
major network could accrue to the benefit of consumers.
    19. We also explained in the NPRM how our analytical framework 
allows us to assess the horizontal effects of the merger of an emerging 
network with a major network on the national market for network 
advertising. We explained that within the national television 
advertising market, which 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.) At present, the network firms 
comprising this strategic group provide the greatest reach of any 
medium of mass communications. Major broadcast networks attract much 
larger audiences than emerging broadcast networks. Since delivering a 
mass audience is becoming more difficult for all media with the 
proliferation of media outlets, media that can still produce mass 
audiences have become more valuable. As a result, notwithstanding some 
recent erosion in revenue growth, broadcast networks have achieved 
substantial 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. 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. Different strategic groups will be defended 
by different mobility barriers that vary in their effectiveness in 
restricting entry into a 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. Notwithstanding some growth in the number of stations over 
the last decade, obtaining sufficient affiliated stations remains a 
major obstacle to developing a new broadcast network that can achieve 
sufficient national reach to be attractive to national advertisers 
seeking to reach a mass audience.
    20. With respect to our analysis of the potential benefits of 
vertical integration of a program producer and a television network, 
Viacom was the only commenter to specifically address the potential 
efficiencies associated with vertical integration, and Viacom's 
pleadings support the Commission's findings. With respect to our 
analysis of the effects of horizontal integration of an emerging 
network with a major network, no commenter disagrees with our finding 
that a horizontal merger between a major network and an emerging 
network (e.g., UPN or WB) would generate net economic benefits.
    21. We conclude that a merger between an emerging network, such as 
WB or UPN, and a major network is likely to produce net benefits to 
network advertisers and viewers of network television. With respect to 
vertical integration, 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 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 targeted by a major network.
    22. With respect to horizontal integration of a major and emerging 
television network, the merger should have little or no adverse effect 
on competition or pricing in the market for television network 
advertising, since major and emerging networks compete in different 
strategic groups. To the extent that the emerging network continues to 
offer programming following the merger that targets niche or special 
interest audiences, then the welfare of viewers of both mass audience 
and niche programming should not be adversely affected by the merger 
and may indeed be advanced by the resulting efficiencies.
    23. Mergers Among the Four Major Networks. After the rule change we 
are making herein, the only multiple network operations that will be 
prohibited by our dual network rule will be the common ownership of 
multiple broadcast networks created by mergers between ABC, CBS, Fox, 
or NBC. Although the questions presented in the NPRM related solely to 
the emerging networks portion of the dual network rule, Fox, Viacom, 
and WB argue for elimination of the rule in its entirety. They contend 
that the rule, established over fifty years ago, is no longer justified 
in light of prevailing conditions. They argue that new competitors--
both broadcast and nonbroadcast--have entered and attracted large 
portions of the market formerly controlled by the networks. They also 
argue that developments over the past 20 years have increased 
competition, reduced the networks' share of television viewership, and 
reduced the networks' share of television advertising revenue. These 
developments, they conclude, support elimination of the dual network 
rule.
    24. The questions presented in the NPRM related solely to the 
emerging networks portion of the dual network rule; the question of 
eliminating the rule

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in its entirety was not squarely presented to this Commission for 
review. Therefore, we will not address that issue in this proceeding. 
This issue was considered in the 1998 Biennial Review, which was 
completed in 2000.

B. Diversity

    25. In addition to the competitive concerns discussed above, the 
modification of the dual network rule involves diversity issues. In 
fact, the only commenter urging retention of the entire current dual 
network rule did so on the basis that the proposed modification would 
undermine traditional Commission diversity concerns. In this regard, 
UCC argues that the NPRM in this proceeding ignored the ``vital first 
amendment issues that animate the dual network rule.'' Allowing one of 
the top four networks to buy UPN and/or WB will, by definition, result 
in the elimination of one or more independently owned broadcast outlet 
at the national level. The record demonstrates that emerging networks 
make a significant contribution to diversity of programming at the 
national level and the stability of their affiliates, thus promoting 
outlet diversity at the local level. The record also demonstrates, 
however, that maintaining the dual network rule in its current form 
would actually jeopardize those contributions to diversity, rather than 
promote them.
    26. The record shows that some form of relief from the dual network 
rule will promote the viability of the UPN network and thus promote 
diversity at the national level. Viacom now owns and operates both the 
CBS and UPN broadcast networks. Absent today's action, Viacom/CBS would 
have until May 4, 2001, to come into compliance with the rule, which, 
as a practical matter, would involve divestiture of UPN. The record 
reflects that UPN is a financially struggling network that has suffered 
losses in every year of its existence. The reasons for UPN's financial 
struggles include competition from both broadcast and non-broadcast 
video sources, decreasing broadcast network viewership, and diversion 
of investment capital to other competitors partly as a result of the 
current dual network rule. These factors affect both UPN and the WB 
networks. Given these factors, there is substantial likelihood that the 
present level of independent network ownership would not be maintained 
absent the action we take herein. In addition, as noted above, our 
analysis suggests that the UPN broadcast television network benefits 
from the efficiencies of vertical integration with Viacom's program 
production facilities. Divestiture would deprive UPN of these 
efficiencies.
    27. Retaining the current version of the dual network rule could 
also have cascading adverse consequences on diversity at the local 
level. Affiliates of a failed network, without network affiliation and 
the programming it brings, may not be able to sustain the increases in 
the cost of programming that they would have to bear should they have 
to purchase programming in the syndication market. Additionally, such 
affiliates would be deprived of a recognized brand that is promoted 
locally by each affiliate and nationally by the network and of first 
run programming that affiliates would have to replace by purchasing 
programming in the syndication market. Thus, the failure of a network 
could imperil the position of many of that network's affiliates and 
have a negative impact on diversity of outlets at the local level.
    28. Additionally, we agree with those that argue that the 
proliferation of video programming networks warrants relaxing the rule. 
At present, some 83.8 percent of television households obtain their 
service from an MVPD such as cable, direct broadcast satellite or 
Multichannel Multipoint Distribution Service. Most of the subscribers 
to such systems have available to them a cornucopia of video services. 
As discussed above, nearly 87 percent of cable television systems have 
30 or more channels. These systems serve 99 percent of cable 
subscribers. Although many of the video programming networks presented 
on cable systems are vertically integrated with cable multiple system 
operators, they nevertheless contribute to diversity by providing 
programming to most viewers that is from a source other than the six 
broadcast television networks covered by the instant rule. Such 
developments have diminished the importance of maintaining UPN and WB 
as independently owned network ``voices.''
    29. Also, we agree with commenters that a major network and an 
emerging network under common ownership would have a strong economic 
incentive to diversify their program offerings, particularly by 
increasing service to minority or ``niche'' tastes and interests. A 
single broadcast network has the incentive to attract the largest 
possible audience with mass appeal programming (which is similar to the 
programming offered by its rivals). However, if two networks are owned 
by a single entity, the entity has an incentive to attract an array of 
viewers with differing interests to produce the largest combined 
audience for the overall enterprise. This allows for the major network 
to pursue mass tastes, with the smaller network programming to minority 
and niche tastes.
    30. The record also supports the proposition that eliminating the 
emerging network portion of the dual network rule will not adversely 
affect the provision of news and public affairs programming. As noted 
by Viacom, common ownership may offer the only realistic potential for 
the carriage of a substantial amount of news and public affairs 
programming by affiliates of the emerging network by allowing the 
resources of the larger network to be re-deployed in ways that serve 
the viewers of the emerging networks by providing them with news and 
public affairs.

C. Additional Matters

    31. The WB Network argues that if we relax the dual network rule we 
are obligated to also eliminate the cable/television cross-ownership 
rule. Otherwise, it contends, we will actually be allowing only the UPN 
Network to be merged with a major network because the cable/television 
cross-ownership rule precludes The WB from such a merger. It argues 
that the Commission cannot, as a matter of law, grant regulatory relief 
to certain competitors but not equivalent relief to others. Since the 
cable/television cross-ownership rule ``stands in the way of similar 
creative business arrangements with an established network, The WB 
cannot be part of a corporate family with any attributable interests in 
licensed broadcast stations in numerous major DMAs. This, it asserts, 
violates fundamental fairness and administrative law that requires the 
Commission to accord comparable treatment to similarly situated 
parties.
    32. Modification or elimination of the cable/television cross-
ownership rule is not within the scope of the NPRM issued in this 
proceeding. We will consider it again in a future proceeding or our 
next biennial review of our broadcast ownership rules. WB network is 
receiving equal treatment by reason of the modification of the dual 
network rule we are making herein.
    33. Additionally, the UPN and WB Networks have each raised 
arguments that the provision of the 1996 Act that defines an emerging 
network does not include it. Given our decision herein, this issue is 
moot.
    34. Finally, we have previously granted Viacom, Inc., a period of 
twelve months, commencing May 3, 2000, within which to come into 
compliance with the dual network rule. Given our action herein, we will 
extend that temporary waiver of the rule until the

[[Page 32247]]

effective date of the instant rule amendment.

IV. Conclusion

    35. Based upon the record and our own analysis, we find that the 
benefits of vertical integration between a program producer and 
television networks will not be lost and may well be augmented by a 
merger of one or more emerging networks with a major network. 
Additionally, the horizontal integration of an emerging and major 
network should not adversely affect competition or pricing in the 
relevant television advertising markets and may produce merger-specific 
efficiencies that provide new benefits to viewers and advertisers not 
otherwise available prior to the merger. The aggregation of the 
possible efficiencies of both vertical and horizontal integration that 
provide the resources for viewer and advertiser benefits support our 
decision to abolish today that part of the dual network rule that 
prohibits the merger of one or more emerging network with a major 
television network.
    36. With regard to diversity, we do not believe that the loss of up 
to two independently owned networks that potentially could result from 
our modification of the dual network rule would seriously compromise 
our diversity concerns. On the contrary, diversity of programming will 
be fostered at the national level as a result of our permitting 
struggling emerging networks to combine with major networks, thereby 
allowing them to continue serving their current niche and minority 
audiences. At the local level, our action will contribute to outlet 
diversity by strengthening the emerging networks and thus promoting the 
stability of their affiliated stations. Therefore, on balance, we 
believe that the modification of the dual network rule is warranted on 
diversity grounds, as well.
    37. We do not believe that a waiver is the better approach to this 
issue and so do not reach those arguments of commenters favoring such 
relief. The subject portion of the dual network rule is unusual 
because, while in form it is a rule of general applicability, in effect 
it only applies to one entity other than UPN (i.e., the WB Network). 
Thus, the rule is so narrow that the specific facts concerning one of 
the only two parties to which the rule applies are quite relevant. 
Also, the two networks are similarly situated from the standpoint of 
economic analysis. Both UPN and WB are nascent broadcast networks that 
target younger audiences compared with the major networks. In addition, 
both networks use UHF stations and LPTV facilities that result in a 
substantial coverage disadvantage compared with the major networks. Our 
foregoing analysis pertains equally to UPN and WB and demonstrates that 
distinct benefits for either or both of them can be derived generally 
from elimination of that section of the rule that prohibits these two 
entities to merge with a major network. Accordingly, elimination of 
that provision of the rule itself, rather than grant of waiver relief 
to only one of the two parties affected by that portion of the rule, is 
appropriate.
    38. In view of the foregoing, we conclude that the dual network 
rule should be amended by eliminating the provision prohibiting the 
common ownership of one of the four major networks and the emerging 
networks. We will reexamine that part of the dual network rule that 
prohibits mergers between the major networks in a future proceeding, 
possibly our next Biennial Review. At that time we will explore in 
greater detail how repeal or modification of that part of the rule may 
affect diversity and consider whether the rule remains necessary in the 
public interest as the result of competition.

V. Administrative Matters

    39. Paperwork Reduction Act of 1995 Analysis. This R&O has been 
analyzed with respect to the Paperwork Reduction Act of 1995 and found 
to impose no new reporting requirements on the public.
    40. Regulatory Flexibility Analysis. Pursuant to the Regulative 
Flexibility Act of 1980, as amended, 5 U.S.C. 601 et seq., the 
Commission's Final Regulatory Flexibility Analysis in this R&O is as 
follows. As required by the Regulatory Flexibility Act (RFA), an 
Initial Regulatory Flexibility Analysis (IRFA) was incorporated in the 
NPRM in this proceeding. The Commission sought written public comment 
on the proposals in this NPRM, including comment on the IRFA. The 
comments received are discussed below. This present Final Regulatory 
Flexibility Analysis (FRFA) conforms to the RFA.
    41. Need For, and Objectives of, Report and Order. In February 
1996, the Telecommunications Act of 1996 (``1996 Act'') was signed into 
law. Section 202 of the 1996 Act directed the Commission to make a 
number of significant revisions to its broadcast media ownership rules. 
Section 202(h) also requires us to review our broadcast ownership rules 
every two years commencing in 1998. One of the rules reviewed in our 
first such biennial reviews was Sec. 73.658(g), the dual network rule. 
In our Biennial Review Report we tentatively concluded that a portion 
of this rule was no longer necessary in the public interest. 
Accordingly, we issued an NPRM proposing the elimination of this rule 
consistent with the goals of the 1996 Act.
    42. Significant Issues Raised by the Public in Response to the 
Initial Analysis. No comments were received concerning the Initial 
Regulatory Flexibility Analysis.
    43. Description and Estimate of the Number of Small Entities To 
Which the Proposed Rules Will Apply. 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.
    44. 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.
    45. 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%) have revenues of less than $10.5 
million dollars.

[[Page 32248]]

Approximately 90 of these small TV broadcast television stations are 
affiliates of the WB or UPN networks and may be affected by our rule 
change. 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.
    46. Description of Projected Reporting, Recordkeeping, and Other 
Compliance Requirements. The R&O imposes no reporting, recordkeeping, 
or compliance requirements.
    47. Steps Taken to Minimize Significant Economic Impact on Small 
Entities and Significant Alternatives Considered. 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.
    48. As indicated, the R&O allows 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 eliminates 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 considered in the Commission's 
1998 biennial review of its broadcast ownership rules (MM Docket No. 
98-35) and herein. In the Biennial Review 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 instant action provides television licensees, including those 
considered to be ``small businesses,'' with increased flexibility with 
regard to the broadcast networks with which they may affiliate. It also 
may help small stations that are affiliated with the UPN or WB networks 
survive and prosper in an increasingly competitive media marketplace. 
Finally, it gives the four major and two emerging broadcast television 
networks, none of which are small businesses, more merger flexibility.
    49. Report to Congress. The Commission will send a copy of this 
R&O, including this FRFA, in a report to be sent to Congress pursuant 
to the Small Business Regulatory Enforcement Fairness Act of 1996, see 
5 U.S.C. 801(a)(1)(A). In addition, the Commission will send a copy of 
this R&O, including FRFA, to the Chief Counsel for Advocacy of the 
Small Business Administration. A copy of this R&O and FRFA (or 
summaries thereof) will also be published in the Federal Register. See 
5 U.S.C. 604(b).
    50. Accordingly, pursuant to the authority contained in 47 U.S.C. 
154(i) and (j), 303(r), 308, 310 and 403, as amended, 47 CFR part 73 is 
amended as set forth in ``Rule Change.''
    51. Viacom, Inc.'s, temporary waiver of 47 CFR 73.658(g) of the 
Commission's Rules, will be extended until the effective date of this 
rule amendment.
    52. The Commission's Consumer Information Bureau, Reference 
Information Center, will send a copy of this R&O, including the Final 
Regulatory Flexibility Analysis, to the Chief Counsel for Advocacy of 
the Small Business Administration.

Federal Communications Commission.
William F. Caton,
Deputy, Secretary.

List of Subjects in 47 CFR Part 73

    Television.

Rule Change

    For the reasons discussed in the preamble the Federal 
Communications Commission amends 47 CFR part 73 as follows:

PART 73--RADIO BROADCAST SERVICES

    1. The Authority citation for part 73 continues to read as follows:

    Authority: 47 U.S.C. 154, 303, 334, and 336.

    2. Section 73.658 is amended by revising paragraph (g) to read as 
follows:


Sec. 73.658  Affiliation agreements and network program practices; 
territorial exclusivity in non-network program arrangements.

* * * * *
    (g) Dual network operation. A television broadcast station may 
affiliate with a person or entity that maintains two or more networks 
of television broadcast stations unless such dual or multiple networks 
are composed of two or more persons or entities that, on February 8, 
1996, were ``networks'' as defined in Sec. 73.3613(a)(1) of the 
Commission's regulations (that is, ABC, CBS, Fox, and NBC).
* * * * *

[FR Doc. 01-14936 Filed 6-13-01; 8:45 am]
BILLING CODE 6712-01-U