Courts tune in to New Era of media consolidation

Cable World, Feb 25, 2002 by John Mansell

Stay tuned for more media consolidation. Three landmark cases at the U.S. Court of Appeals in Washington, D.C., promise to forever change the face of media concentration.

A year ago in Time Warner Entertainment v. FCC the court said the FCC had "not met its burden under the First Amendment" to justify its 30% cap on cable system ownership and ordered the FCC to come up with a new rule and rationale.

On Feb. 19, in Fox TV Stations, et al v. FCC, the same court invalidated the 32-year-old ban on cable system-TV station cross-ownership and served notice that the days of a national 35% (of TV homes)broadcaster ownership cap are numbered.

Later this spring the D.C. Circuit Court will likely complete the triple play by tossing out the ban on multiple TV station ownership in a market.

There's a common thread throughout the three cases: judicial recognition that it's a new ball game. As a result of the proliferation of TV stations, cable's growth and the emergence of DBS, the scale and scope of competition have dramatically changed. The rules must evolve, too.

The stage is set for Disney, News Corp. and Viacom to buy cable MSOs to achieve full vertical integration and for cable ops to acquire networks. The most obvious merger candidate is NBC, which USA Network's Barry Diller and AOL Time Warner have been coveting.

Perhaps the biggest winner is Rupert Murdoch, who longs to marry content and distribution in the U.S. Murdoch can go out and buy MSOs. And if he can buy MSOs, why not DBS?

General Motors was supposedly nervous that a News Corp.-DirecTV deal faced more antitrust impediments than an EchoStar combination.

That may have been a mistake. If the handicappers are right and the Justice Department turns thumbs down on Charlie Ergen's quest for DirecTV, Murdoch may be waiting in the wings. Disney and Viacom might be there, too.

Of course, no merger discussion is complete without mentioning Paul Allen, John Malone and Bill Gates, all of whom have been involved in efforts to bankroll DBS deals.

Thanks to a broader pool of potential purchasers, Adelphia, Cablevision and Cox--all with second-generation managers--are now more likely to be sellers than buyers.

The demise of ownership regs could also reignite telco interest in cable alliances and spark newspaper media conglomerates, such as the Washington Post, to expand their cable interests.

Based on the Sept. 7 oral argument, the decision was expected. At the very least, the FCC will have to come up with better-reasoned policies and economic analysis in order to justify ownership limitations.

As with the cable ownership cap, the FCC will have to relax its rule, if not jettison it altogether, which is just fine with FCC Chairman Michael Powell. When the FCC refused to do away with its regulations two years ago, Powell dissented. He has said he doesn't usually favor ownership caps because they often outlive their usefulness.

No doubt Media Access Project will seek Supreme Court review, but the high court recently turned down MAP's petition for certiorari in the cable cap case, and it's doubtful the court will take this case, especially if the FCC doesn't seek review.

The court gave no credence to the FCC's first line of defense--a procedural claim that its rules were not final, were not meant by Congress to be subject to review and were not ripe for review because the Commission had merely declined to institute a rulemaking.

Retaining the Network TV Station Ownership Cap (NTSO) rule was held to be arbitrary and capricious, but because the rule does not necessarily violate the First Amendment, the cap was remanded to the FCC, rather than vacated. Cable ops fared better. The ban on cable/broadcast cross-ownership (CBCO) was held to be arbitrary and capricious and vacated.

Time Warner claimed efficiencies of combining its local-news channel NY1 with a TV station and argues that the rules hinder its WB network from competing with other TV networks.

The FCC said the rule continues to be necessary because a cable operator that owns a TV station can discriminate against other stations by offering joint ad sales.

Furthermore, the cable operator would have an incentive not to carry competing stations or their digital signals as well as an incentive to place TV stations on undesirable channels. Time Warner claimed the combination of must-carry and DBS competition ensure that TV stations are carried on cable systems.

FCC refusal to mandate must-carry for duplicate digital signals also suggests there isn't a significant discrimination problem, alleged TW.

Judge Douglas Ginsburg, who wrote for the three-judge panel, agreed. The FCC was "unresponsive" and "unpersuasive" in its answers to IMPs "persuasive" and "plausible" arguments and "has not shown a substantial enough probability of discrimination to deem reasonable a prophylactic rule as broad as the cross-ownership ban," he said.

As for CBCO, there may be strategic value for a cable operator to own TV stations for the following reasons:

* Potential exclusivity from DBS and overbuilders