CBS-Viacom Deal Renews Debate Over TV Station Ownership Rules

A recent survey calls for the removal of national caps on station ownership. But independent station groups fear that would cause them to lose leverage to the networks.
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Follow this logic, if you can: Network X owns a television station in New York. Network X wants to buy a station in Dallas. No problemo, right? A local television station in Dallas doesn't compete with one in New York, right? Different ad market, different viewers, right?

Wrong, the

Federal Communications Commission

tells Network X, you can't buy that station in Dallas. You already own too many other stations.

Shoot, says Network X. Too bad. Hey, if we can't buy that station in Dallas, how about letting us buy another one in New York, a station that directly competes with the one we already own there?

Sure, says the FCC.

Welcome to the world of television station ownership rules, a wacky place where owning stations thousands of miles apart is a threat to competition, but owning two in the same city is perfectly legal.

"There's no way to rationalize the national and local rules," says Michael Katz, a former FCC chief economist. "

They just don't serve the public interest."

Katz, now a professor at the

University of California at Berkeley

, released a survey last week calling for the FCC to eliminate its national caps on station ownership, which now prevent any company from owning television stations that reach more than 35% of homes nationwide. (Katz's survey was financed by three networks, including

Fox

(FOX) - Get Report

, which owns a small stake in

TheStreet.com

(TSCM)

, the publisher of this Web site.)

Networks have grumbled about the irrationality of the cap for years. Now the merger of

Viacom

(VIA) - Get Report

and

CBS

(CBS) - Get Report

has pushed the limit into the spotlight. Together, the two companies will own stations that reach 41% of U.S. homes.

No one expects the cap to stop the deal; if necessary, the companies will sell enough stations to get under the limit. But the merger has stepped up calls for the commission to raise or eliminate the caps. A bill introduced last week by U.S. Sen. John McCain (R., Ariz.) would hike the limit to 50% and allow the FCC to lift it further in coming years.

For investors in media companies, the fight is significant. Last month's FCC's decision to allow duopolies has already sparked new interest in independent station groups like

Hearst-Argyle Television

(HTV)

and

Sinclair Broadcast Group

(SBGI) - Get Report

, with analysts predicting the locals will quickly consolidate to take advantage of the FCC's new rule. If McCain's bill passes, the networks, which are generally close to the current cap, would be free to buy new stations, and the pace of mergers and takeovers would only increase (see

TSC's

story on the stations as takeover bait).

In theory, the cap is designed to promote competition, diverse on-air viewpoints and minority and local station ownership. It's "tremendously important" for syndicators, which produce shows like "Divorce Court" that appear outside primetime, says Andrew Jay Schwartzman, president of the

Media Access Project

, a nonprofit group that aims to increase the diversity and quality of programming. If networks own stations across the country, then they'll have too much power over syndicated shows, reducing diversity, Schwartzman says.

But Katz notes that the overall market for programming has expanded dramatically over the last two decades because of the growth in cable networks. The proof: There are more new shows than ever before -- and programming costs are spiraling higher.

Meanwhile, the cap hasn't accomplished its objectives, Katz says. Only 16 stations nationwide are minority owned, and station groups, not local owners, control most major-market stations. The competition argument has always been bunk, because local stations compete regionally, not nationally. Even Schwartzman agrees that "the most important issues with respect to concentration are the local ownership issues," not the national cap.

But the powerful

National Association of Broadcasters

, which represents both local stations and networks but is dominated by the stations, wants the cap to stay at 35%. It won't say why.

Privately, though, everyone connected with the issue agrees that the independent station groups are the main force behind the cap. At first glance, that stance might seem bizarre. After all, the networks will probably pay more for stations than anyone else.

The answer lies in the fierce fights between the networks and the stations over "comp," the hundreds of millions of dollars the networks pay local stations every year in return for the stations' agreement to broadcast network programs and national ads. In the good old days, when broadcast television was a fat and profitable business, this arrangement seemed fair to both sides.

But competition from cable and soaring programming costs have made the networks a lousy business. Only

NBC

is expected to turn a profit this year. While local stations have also felt pressure from cable, they remain profitable. So the networks are increasingly pressuring their affiliates to share their profits by accepting lower compensation.

"We should be free to distribute our product in a way that makes sense for the marketplace," says a lobbyist for a major network. "We're going out and spending billions of dollars on football, and then having to beg our affiliates to help us defray our costs."

Thus the networks are a threat as well as a partner for station groups, which fear that the networks will make them an offer they can't refuse if the FCC lifts its cap: Accept our buyouts or watch us buy other stations in your market and switch our programming to them. This was the not-so-hidden logic behind NBC's decision last week to buy 32% of

Paxson

(PAX)

, a big owner of low-power UHF stations, with the option to buy more if the FCC raises the cap. On the other hand, with the cap in place, the big independent station groups can buy more stations without having to compete with the networks on price. And every station they add will increase their leverage against the networks as the fights over comp get fiercer.

The only reason the cap still exists is "the big affiliate groups somehow being worried that this is going to cost them money," Katz says. "I just don't see where there's a big public interest in getting involved."

As originally published, this story contained an error. Please see

Corrections and Clarifications.