Court Rejects FCC’s Limits on TV Ownership

A federal appeals court Tuesday raised the likelihood of a major new wave of takeovers in the media industry, ruling that regulators wrongly blocked companies from expanding their hold on the nation’s TV audience.

For decades, the government has limited corporate ownership of television stations. Currently, the Federal Communications Commission says companies can reach no more than 35% of U.S. households. This standard was challenged, and Tuesday the U.S. Court of Appeals called it “arbitrary and capricious and contrary to law.” The Washington court sent the matter back to the regulatory agency and gave it two choices: justify retaining the ownership limit or modify it.

In addition, the three justices overturned an FCC ban on companies owning a cable TV system in a market where they own broadcast stations.

If the TV ownership rules were dropped or significantly relaxed, it would represent the biggest change since the rules were first imposed in the 1940s. The media landscape has changed drastically in recent years with a wave of consolidations, including the merger of America Online Inc. and Time Warner Inc. In its early days, the regulations covered the three TV networks at the time; today there are more than half a dozen TV networks plus scores of cable channels.

The court’s actions will intensify the debate over whether rampant consolidations are undermining competition and thus limiting the sources of information. In essence, the ruling cracks open the door for an acceleration of the merger trend.

“This decision is likely to lead to a dramatic change in the underlying economics and structure of the traditional mass media, with the large broadcast television networks and cable operators the primary beneficiaries,” said Blair Levin, an analyst at Legg Mason Wood Walker Inc. and a former FCC chief of staff.

A spokesman for the FCC said Chairman Michael Powell had no comment on the rulings, but said the agency would “study the decision.” Powell, the son of Secretary of State Colin L. Powell, was appointed FCC chairman a year ago by President Bush and has urged modifying or repealing ownership limits.

The current case stemmed from a split decision in May 2000 by the FCC to retain the ownership limits. Powell cast one of the dissenting votes, urging further study of the 35% cap.

A suit was filed by Viacom Inc., which owns the CBS and UPN television networks, and News Corp.’s Fox Television unit, which are both above the 35% limit, and General Electric Co.’s NBC. The broadcasters protested the FCC’s ownership limit, arguing it was no longer needed to protect the public interest because cable television and the Internet have dramatically broadened consumer choices.

“We are pleased that the court of appeals agreed that the FCC had failed to justify the national ownership cap. . . . We hope that now the commission takes a fresh look at this antiquated rule,” said NBC spokesman Cory Shields.

Consumer and media watchdog groups voiced outrage at the court ruling and vowed to appeal it, saying media ownership limits encourage democratic discourse and a variety of viewpoints in the media.

“It’s a radical effort by the court of appeals to . . . expand corporate free-speech rights at the expense of the public’s 1st Amendment rights,” said Gene Kimmelman, co-director of the Washington office of Consumers Union. “We will definitely try to seek Supreme Court review of this decision.”

In the 1940s, owning three stations was the limit. In 1984 that was lifted to 12 stations, with a limit of 25% of the national audience. The passage of the Telecommunications Act in 1996 eliminated the station ownership limit and raised the limit on national audience reach to 35%.

Over the last year, Powell had bided his time on the TV audience cap, hoping the court would resolve the controversial issue.

In throwing the case back into Powell’s lap, the court placed no time limit on how quickly the FCC must act. But legal experts said it would probably take months before any new ownership rule is in place, and Powell could choose to not write a new rule at all, although a former federal official close to him said that was unlikely.

With smaller TV station companies struggling financially amid an advertising slowdown, experts predict that as many as 100 TV stations could change hands if the audience cap is lifted or significantly relaxed.

Tribune Co., which acquired the Los Angeles Times two years ago, is one of the major media companies that could add stations to its broadcasting operations.

The Chicago-based company now holds a minority stake in WB television network and owns several WB stations in major markets, including Los Angeles.

Cable giants like AOL Time Warner Inc., would be able to buy stations in markets where they already own cable TV systems. AOL, which owns the WB network, has expressed interest in acquiring NBC.

“If [cable companies] can find the synergy, they will likely buy the local television station” and combine news and advertising staffs to save money, said Mark R. Fratrik, an industry analyst at broadcast research firm BIA Financial in Chantilly, Va. He speculated that cable companies, already heavily into all news channels like MSNBC, Fox News and CNN, may extend the concept to local TV markets.

Fratrik also said that if the TV audience cap is eliminated or eased by the FCC, the TV networks probably will buy smaller TV stations already affiliated with the networks.

For example, he predicts Walt Disney Co., which owns ABC, might try to acquire Albritton Communications Co., which owns seven ABC Television affiliates. McGraw-Hill Cos., which owns four ABC affiliates, similarly might attract network attention, Fratrik said. Bigger TV broadcasters that own a mix of network affiliates, like Hearst-Argyle Television Inc. and Sinclair Broadcast Group Inc., may be less likely targets for the networks, he said.

“I don’t sense there’s this tidal wave of demand out there. There’s focused demand,” said Frank Biondi, former chief executive of Viacom. “If you can buy [TV properties] at the right price, and if you get economies of scale. But the big guys are already big. On an absolute basis, this is not going to make or break the parent companies.”

The appeals court decision means News Corp. and Viacom will not have to immediately sell some of the television stations they acquired in separate deals.

Viacom purchased CBS Corp. two years ago for $50 billion and News Corp. acquired 33 TV stations last year in a $4.4-billion deal with Chris-Craft Industries Inc. Today, both companies reach about 40% of the nation’s 100 million TV households.

But the appeals court left the door open for the FCC to retain its controversial ownership regulation and to force News Corp. and Viacom to sell TV properties to comply.

The court ruling represents a vindication of the Bush administration’s efforts to undo decades of regulations aimed at promoting diversity of media ownership.

“The court gave a clear refutation of the [Clinton administration’s] approach to media ownership restrictions,” said Harold Furchltgott-Roth, a Republican and former FCC commissioner who served with Powell. “The court said the commission can’t simply come up with an arbitrary [audience] number. . . . There’s a certain legal standard that applies.”

Consumers are unlikely to see any immediate on-the-air changes because it will take a while for ownerships to change hands.

Smaller TV station owners have long sided with consumer watchdog groups in saying the cap promotes diverse local programming.

Edward O. Fritts, CEO of the National Assn. of Broadcasters, said he was disappointed by the court’s decision. “The 35% television ownership cap has been critically important in preserving the network-affiliate relationship that has made the U.S. system of free, over-the-air broadcasting the envy of the world,” Fritts said.

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Times staff writer Jeff Leeds contributed to this report.

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Media Ownership

A U.S. appeals court ruling that sets aside a government rule that bars a company from owning television stations that reach more than 35% of U.S. homes could lead to a new wave of media consolidation. A history of regulations on media ownership:

Rules limiting the ownership of television stations date back to the 1940s, when the government prohibited broadcasters from owning more than three outlets.

In 1984, the limit was raised to 12 stations and set a national cap on the reach of broadcasters to 25% of the audience.

In 1996, Congress passed a landmark telecommunications bill that eliminated the station cap and raised the broadcasterseither maximum allowed reach to 35%.

Major media conglomerates and their ownership of television stations:

General Electric’s NBC: 13 stations; estimated reach, 28%.

Viacom’s CBS and UPN: 34 stations; estimated reach, 39%

News Corp., owner of Fox: 33 stations; estimated reach, 39%

Disney Co.’s ABC: 10 stations; estimated reach, 25%