Lifting of cross-ownership ban doesn't stun cable operators: justice department could slow down wave of media consolidation

Cable World, Feb 25, 2002 by Verne Gay

Hypothetical question: How many revolutions must an industry undergo before it turns into something totally different? Five? Or six? That sounds like a nice round number and maybe not so hypothetical at all if the industry happens to be telecommunications.

When the '90s began, everything seemed so simple. We knew broadcast television was different from newspapers, which were different from cable, which was different from radio, which was different from.... But by decade's end, differences melted, boundaries blurred and the only lines remaining had been delineated by a federal bureaucracy that didn't even appear to know why it was still around. Or so its critics would charge.

Then, after a string of mergers, technological innovations and one single all-encompassing act by Congress, a handful of major industries would all begin to roll into one. The only obstacle keeping a handful of major companies from all rolling into one were these few remaining anachronistic rules. Or so critics of these rules would charge.

Finally, the '90s have come full circle. Last week the critics won big and another revolution is at hand. Now comes the multibillion dollar question: What will this industry morph into now? After a federal appeals court ordered the FCC to rewrite the 35% cap on TV station ownership and "vacate"--a polite word for "dump"--the cable/television cross-ownership rule, one major cable operator dryly observed, "This is an important crossroads for the business formerly known as cable."

How important and how far-reaching? Even after last week's stunning reversals for the FCC, no one, in fact, really knew for certain. Yet for a business that thrives on speculation as much as deal-making, the Feb. 19 rulings signal a watershed moment in the questionable art of media guesswork. General Electric would now be free to sell NBC to ... Comcast? AOL Time Warner could finally purchase a major station group, say ... Sinclair or Tribune? Disney could add an MSO to its portfolio, like ... Cox or Adelphia (why not both!). Or perhaps AT&T could add Disney to its portfolio.

But to really figure out what this all means, say observers, it helps to have a little perspective. Foremost, the rulings were not unexpected, and anyone who has even casually followed the case at the U.S. Court of Appeals for the District of Columbia Circuit knew the FCC--which put up a half-hearted defense--was a certain loser. "The Commission responds feebly," the court noted acidly at one point in its published opinion. "It is largely unresponsive ... to arguments."

Appeals are expected, but "these rules are over," says Richard Wiley, senior partner of Wiley, Rein & Fielding, and former chairman of the FCC (1970-'77). "The commission will realize they'll have a very high burden [of proof] and low probability that they'll be able to sustain that burden. And keep in mind, Chairman [Michael] Powell even opined that it was questionable these rules should be sustained. I think it's a dead duck."

Obviously, everyone else did as well. Even so, cable operators seemed to yawn en masse last week. The cable/broadcast cross-ownership rule was gone? So what. "I wasn't surprised," says a general manager of one of the country's biggest systems. "Gosh, I think everybody expected this to happen, and as I sit here and say, `I wonder how this will impact me ... on a day-today level?' I don't see a huge impact at all."

The reason isn't simply the absence of the element of surprise. Rather, few can see how the collapse of an ancient rule necessarily means cable will collapse into the anxiously awaiting arms of broadcast television, or vice versa. "I'm not sure it's terribly significant at all, and in fact I'm pretty certain it's not that significant," says Stephen Effros, cable consultant and head of Washington, D.C.-based Effros Communications. "There's this presumption that seems to be ongoing in the investment community that it will result in all sorts of merger activities, but--with the exception of network television--I don't think that's true. If you're a cable operator, what exactly do you get by simply owning a broadcast station?"

Others say that one significant barrier may have fallen last Tuesday, but another one looms on the immediate horizon. A senior executive at a major entertainment company said, "The thing people have been missing is this little entity called the antitrust division of the Justice Department. In any of the recent mergers--Viacom and CBS, Time Warner, AOL, go back as far as you want--the issue wasn't the FCC, but the higher hurdle was the Justice Department. They do things like look at ad revenue shares, and if you're the local cable operator and you have half a brain and have learned how to sell local advertising, which most of them have and then all of a sudden you buy a local TV station that also has a nice share of the local ad market, you're going to have to convince the Justice Department that's a good thing. That's not always an easy task. And don't forget, this Justice Department hasn't exactly been rolling over for Bill Gates, either."