US broadcasters have faced FCC media ownership limits for decades, and those rules have persisted even though broadcasters face a slew of new competition from the Internet. Broadcasters took aim at some key FCC ownership rules in a court hearing this week. Will those rules survive and what lies ahead? This is a Votes and Verdicts Brief.
Hello, and welcome to the Votes and Verdicts podcast hosted by Bloomberg Intelligence, part of Bloomberg's Research department, with five hundred analysts and strategists working across all major world markets. Our coverage includes over two thousand equities and credits, as well as outlooks on more than ninety industries and one hundred market induses, currency, and commodities. In this podcast series, we talk about the intersection of business policy and law.
My name is Jennifer Ree and I'm a senior litigation analyst with Bloomberg Intelligence covering antitrust.
I'm Matt Schuttenhelm, an analysts covering US litigation and policy in the TMT space.
Our Votes and Verdicts Brief series highlights one of our research reports on the Bloomberg terminal, giving you quick takeaways to help you grasp a key litigation or policy topic. Today, US broadcast ownership rules and the industries push to finally make them go away. Matt, let's get started. There is an important court hearing this week concerning broadcast ownership rules.
As I mentioned, that's what our topic is today. But before we dive into what happened at the hearing, can you just briefly remind us what media ownership rules are currently enforced at the Federal Communications Commission and which companies do they affect?
Sure, Jen, So, there are two main categories of rules at here at issue here, first of all, is a rule on how many TV households across the United States one company can serve, and under the FCC rule, no company may serve more than thirty nine percent of US households. Now, that's discounted a little bit for technical reasons for a certain class of stations, but effectively it's thirty nine percent
with that discount added on. And so no internet video platforms face any sort of national limitation like that, whereas US broadcasters are limited to reaching a subset of the US population. A second set of FCC rules address local markets, the DMAs in New York and Chicago across the United States, and they say how many TV and radio stations one
company can own in each of those local markets. And on the TV side, the important thing to know is that the FCC rule effectively prevents one company from owning two top four ranked stations in a local market. And broadcasters say they could benefit from significant economies of scale by owning multiple stations per market. But this FCC rule, which has been on the books for decades forbids that. So what companies are we talking about that are most
impacted here? For TV broadcasters, we're talking about Nextstar, Tegna, Sinclair, scripts Gray, as well as some larger companies that also own the broadcast networks like Fox and Disney. They own TV stations in local markets as well. And on the radio side, it impacts companies like iHeartMedia and Cumulus.
Okay, so you talked about the thirty nine percent rule and the local ownership rules. Let's focus on that first. The court hearing that I mentioned before and that I know you listened into, was March nineteenth and the Eighth Circuit Court of Appeals. So why was that particular hearing particularly important?
Yes, so you're exactly right. So this was This was a court hearing just on the local market role, not the thirty nine percent national ownership cap. And how this was teed up is that Congress wrote to statutes that makes the FCC review that local rule every four years. It's called the quadrennial review, to confirm that that rule still makes sense in light of competition, in light of the public interest, and the FCC is supposed to remove
the rules that don't pass that test anymore. And in twenty twenty three, the Biden FCC finished the late version of that mandated four year review and it said, yep, we're going to keep all of these broadcast rules, and we're even going to tighten some of them. And this court case was broadcaster's challenge to that Biden era order. And what's really fascinating about the case is that the broadcasters don't just ask the court to knock out that
decision by the Biden FCC. They asked the court to go further and to wipe off the rules from the books entirely. And broadcasters have actually tried this strategy before, they've tried it in a number of times, but that litigation has been stuck before the same three judge panel in the Third Circuit in Philadelphia, and those three judges have basically kept everything in place in case after case
after case. But in the most recent version of this four year year review, the US Supreme Court finally stepped in, and because of that, that broke this litigation free from that three judge panel in Philadelphia. And that's how we're in the Ace Circuit now, which is a court that's very different from the Third Circuit. It's dominated by Republicans, and the case that was argued this week was heard
by three Republican appointed judges. Republican appointed judges tend to be more skeptical of regulation, tend to be more business friendly. So broadcasters are already starting in a better place than they've been with their litigation stuck in the Third Circuit for case after case. And so really this is about timing in terms of the importance of this litigation, because under Brendan Carr, the new chairman of the FCC under President Trump, the FCC I do think is likely to
work to ease these broadcast ownership rules. But the important thing to know is that takes time. It's a slow process. Under the Administrative Procedure Act, you have to go through a full rule making to do that, and that can take six to nine months at best, sometimes much longer than that. But if the broadcasters won a big win
in this court case, everything goes much faster. If this court takes the drastic step of saying, you know what, FCC, you were supposed to review these rules and strike them down every four years. You didn't do that, So we're going to throw out those rules ourselves. And if the court did that, that would speed up the deregulation that the broadcasters would see, make it all happen much faster.
All right, So their outcome here could actually, you know, be pretty impactful for the broadcasters. You listen to the oral arguments, so what was your impression? How do you think they went? And also when do you think we're going to find out a result?
Yeah, so if I were the broadcasters, I would not be pop being the champagne bottles. Yet, I thought this three judge panel yesterday, listening to their questions, which isn't always an indicator of how they're going to rule, but I thought they were surprisingly even handed and moderate in
their questions. Both sides faced fairly difficult questions and I think most importantly, the judges asked no questions about remedy, the remedy of just striking these rules from the books, and I think if a judge was thinking about going there, you would have at least seen the judge explore that a little bit with questions. So I think the idea of a big broadcaster win the biggest broadcaster win is not likely. Will will the broadcasters still win this case?
I think so. I think the court will fault the FCC's reasoning for hanging on to this rule, and also it's tightening of the rule in some respects, but I think the remedy will be pretty modest. It will the court is very likely to not take the step itself of striking down the rules. It's likely to throw this
all back to the FCC for a do over. In terms of timing, when will we see this court decision, we don't know exactly, but typically federal appeals courts take three to six months to decide cases, so I would ballpark looking for it early this summer is when will likely see that decision.
So if the case goes as you expect as you just outlined, what then is next for broadcasters that are really looking to try to get these rules ease.
Yeah, So, assuming that this isn't a sweeping win for the broadcasters that just wipes the rules off the books immediately, we are back to the FCC needing to deregulate itself through the Administrative Procedures Act through a rule making. So the first step there will be the FCC will need to vote to release a notice of proposed rule making to unwind both these local market rules how many stations you can own in each market, as well as the
thirty nine percent national ownership cap. And the important thing to know about that rulemaking process is not only that it takes time, but also that it's because it's controversial, the FCC can't start it until it has a majority of Republicans at the FCC. Democrats are likely to oppose this effort, and currently the commission is evenly divided. It
has two Republican commissioners and two Democrat commissioner commissioners. So I don't think this action will start until either the Senate confirms President Trump's new Republican FCC nominee Olivia Trustee, she's awaiting a hearing at the Senate Commerce Committee, or one of the Democrat commissioners steps down. Just this week.
Jeffrey Starks, one of those Democrats, said he would be resigning his position, but he left it sort of vague, he said in the spring, and so that may be a signal he's going to wait until Olivia trustee is confirmed so as not to let the Brendan Carr the Republicans start work on this any earlier. So that remains to be seen. But this is all going to play out in the rulemaking process, most likely again barring a surprising, big, big win for the broadcasters in this a circuit case.
And really to close this out, Jet, I think it makes sense to kind of pivot over to your expertise on antitrust. I think the US broadcasters have a solid chance to ease these FCC rules either one way or or or another, either through this court case or through deregulation. But that's not the end of the story, because the companies not only need to get past the FCC, they need to get past antitrust review as well. Well, let's
turn to you on that. How much of a risk do you see antitrust review on this topic?
Yeah, well, thanks, Matt, I mean that's right, that's kind of step one if the broadcasters are really looking to expand their ownership in the way that you've described. The FCC is step one because they also if they're going to do a deal by another broadcaster own a lot more stations, they're going to have to also go through anti trust review at the Department of Justice. Now, unlike the FCC, the DOJ doesn't have these specific rules like the thirty nine percent rule you mentioned or the local
ownership rules. They have a set of merger guidelines that they use to assess a deal in any industry, right, and so those guidelines also apply to broadcast TV deals. And the thing is, the way the transactions are analyzed generally makes it difficult for any broadcaster to owner operate any more than one TV station affiliated with the Big Four.
And when I talk about the Big Four, I mean CBS, ABC, NBC, and Fox, And it's just the way the analysis works would really probably end up banning ownership of more than one. And that you know, that's aside from whatever the FCC rules say or whatever they do. And what I'm talking about, though,
is how the DJ has historically analyzed broadcaster deals. There have been a lot so we have a big history, and the DOJ analysis has been very consistent, you know, through administrations Republican and democratic, it's kind of been the same analysis. Now I'm going to walk through what that is and why it's hard to own more than one
of those Big four stations. But I do want to say that there is kind of a wild card right now with respect to future deals, because there's always possible way in or influenced by President Trump, and that could have some change in what has historically been the assessment of the deals. But let me just talk about these
Big four stations. The DOJ views them as being in a class by themselves and having greater importance to consumers and advertisers and a broadcasters than any of the other stations I'm talking about other broadcast stations or cable network programming, because what the DOJ says is that Big Four content has special appeal to viewers. And that's really mostly because
they carry the local sports and the local news. They carry sports, and the popular prime time programs they carry are those that are intended to have a mass broad appeal rather than just appeal to niche markets, and other stations largely don't have that kind of programming. And the other thing that they observe is that the Big Four or the highest rank in terms of audience share in ratings in each local area. Matt, you called those DMAs. That's what I'll go ahead and call these local areas DMAs.
And that's based on Nielsen ratings. Now, because of this, because of this special appeal, the cable companies, light companies, fiber optic, TV, YouTube or Hulu, you know, any entity that offers up a package of stations for consumers to buy for a price, they regard the Big Four programming as it must have. They have to include those in
packages they offer subscribers. Now, I'm going to call those companies MVPDs, and I'm referring to cable, satellite, fiber optic, and some of these over the top providers that package stations. So what that means is that when an MVPD and a broadcast station group have a contract and they're negotiating a retransmission fee at you know, the expiration of the agreement or at a new agreement, and they can't come to terms, the result can be a blackout. Right, We've
all seen that. We've seen that in sports it's very frustrating when in your local area as station's blacked out, and if the broadcaster has just one Big four station, it doesn't really hurt the MVPD very much because viewers, if they're watching CBS it's blacked out, they can move over to NBC or ABC or to Fox, and that really limits a broadcasters of ability to extract higher fees
from the MVPD. Now, if a transaction would give a broadcaster the ability to black out more than one of those Big four stations simultaneously, what that does is it increases their bargaining leverage with the MVPDs and that will likely lead to increased retransmission fees, and those fees generally or pass through to consumers. So it means the consumer's price goes up, and that's consumer arm and that's what the anti trust enforcers are trying to prevent. That's the
main concern, the first concern the DJ has. They do have a second one, though, and that's in relation to the sale of broadcast television spot advertising. So these are local ads I'm talking about, not national commercials, And it's kind of the same analysis that I just walked through. If a broadcaster has control of more than one of these big four stations, it would result in higher prices to local businesses and other advertisers that are just trying
to reach audiences in that DMA. And again it's because these stations are special for certain advertisers who want to target a broad audience in a local area, and the advertisers view these stations is more important to them than advertising on other stations. Now, I will say this, the advertising markets are changing a lot, and this second concern could fall to the wayside, you know, as viewing habits of consumers keep evolving and the advertising market continues to change.
But even if that drops off as a concern of the DOJ, you still have this issue of the retransmission fees.
And that's a big one because it translates directly into higher prices for people, and I don't see that when going away now, just to close this out, Matt, I did mention that there's kind of a wild card in that Recently, President Trump has sought to exert significant control of regulatory bodies executive branch agencies, and as part of kind of that, he may try to weigh in on specific deals and push his DOJ to reach his desired result, and of course that could lead to a change in
this analysis that the DOJ's really implemented for years now. It remains to be seen whether this happens or not, whether if he tries to exert influence, whether his DJ will do his bidding, perhaps going against what the antitrust laws would say they should do. But I raised this because we did see a little bit of this pattern during Trump's first term, so it is possible. But you know, I'll say that the deals can still get done. But the difference is no matter what the FCC is done
in relaxing their rules. If they do, the companies normally would have to agree to divest stations in order to get a deal done, where the overlaps result in this ownership of more than one of the big four broadcast TV stations in any DMA. So you know, I suspect that would be the case going forward. But with the caveat of the Trump.
Wildcard, that's really helpful. Jen, Thank you so much, because that's an important piece of this story. Just getting past the FCC is not enough. You got to win an antitrust review as well. So with that, let's close it out. Thank you Jen for joining me today. That's today's Votes and Verdicts brief. For our full report on the topic and all of our research, please visit bi laws on the Bloomberg terminal and thank you for tuning in to Votes and Verdicts.