F. Dual Network Rule Relaxed To Allow Certain Mergers

     In May 2001, the Federal Communications Commission amended the dual network rule, 47 C.F.R. Sec. 73.658(g), to permit a merger between one of the “Big Four” television networks and an emerging network.  In the Matter of Amendment of Section 73.658(g) of the Commission’s Rules - The Dual Network Rule, Report & Order, 16 FCC Rcd. 11114 (2001). 

     The Commission’s decision was a logical outgrowth of its preliminary determination, announced in May 2000, that such a merger would likely produce an economically efficient network without unduly harming competition or viewpoint diversity.  See 1998 Biennial Regulatory Review - Review of the Commission’s Broadcast Ownership Rules and Other Rules Adopted Pursuant to Section 202 of the Telecommunications Act of 1996, 15 FCC Rcd. 11058 (2000).  Although the Commission is now allowing mergers between Big Four and emerging networks, it declined to eliminate the dual network rule entirely.

     The dual network rule (which dates back to the late 1930s) originally prohibited any entity from maintaining more than a single radio network.  The rule was extended to television in 1946, prohibiting a television broadcast station from affiliating with a network organization that maintained more than one broadcast network. 

     The Telecommunications Act of 1996, Pub. L. No. 104-104, 110 Stat. 56 (1996), altered the rule: It permitted a broadcast station to affiliate with a network organization that maintains more than one broadcast network, unless the multiple network combination was created by a merger between “established” television networks -- ABC, CBS, NBC, and Fox -- or between a Big Four network and either of the two “emerging” networks, WB and UPN.  In its recent Biennial Review, the Commission determined that prohibiting a merger between UPN or WB and one of the four major networks was no longer necessary to protect the public interest concerns of competition and diversity.

     In considering whether to eliminate the portion of the dual network rule that prohibited mergers between Big Four and emerging networks, the FCC analyzed the networks’ ability to be more efficient through horizontal and vertical integration.  It first noted that significant changes to the competitive environment had taken place since the 1996 Act was passed, and that these changes had decreased the market influence of network broadcasters.  Within the broadcast industry, the number of commercial and noncommercial television stations increased significantly, thus decreasing broadcast networks’ dominance over viewers. 

     Additionally, viewership among the top six broadcast networks decreased markedly, again demonstrating that the broadcast networks are not as dominant as they used to be.  Finally, the cable industry expanded its penetration and channel capacity, and the direct broadcast satellite (DBS) industry grew substantially.  These factors combined to decrease network broadcasters’ dominance, and encouraged the Commission to relax the dual network rule.

     Because relaxing the dual network rule would almost certainly permit mergers between vertically integrated firms, the FCC analyzed whether vertical integration between broadcast networks and program suppliers is more efficient than requiring those entities to negotiate arms-length transactions.  The Commission concluded that because vertical integration reduces the transaction costs associated with contracting, it could very well benefit consumers, especially where competition for viewers is increasing -- as it is in the current marketplace.

     Next, the FCC concluded that a horizontal merger between an emerging network and a major network would generate net economic benefits by spreading operating costs across multiple networks.  For example, as Viacom Inc. pointed out in its comments, CBS could offer UPN substantial savings by combining the two networks’ accounting, traffic, business affairs, financial reporting, and engineering functions.  The Commission also noted that the negative effects of a merger between an emerging network and a major network would be minimal where the programs on the networks appeal to different demographic groups.

     The Commission also determined that a horizontal merger could be assisted by vertical integration because integration could help networks deal more efficiently with the risks of program development.  These risks might be lessened if networks were able to reach different viewers in different time slots. 

     Although the Commission determined that eliminating the portion of the dual network rule prohibiting mergers between Big Four and emerging networks would not harm -- and could enhance -- competition, it declined to eliminate the rule entirely.  The Commission noted that commenters advocating total elimination of the rule did not agree on whether a merger between two major networks would unduly enhance their market power over other segments of the television industry.  Nonetheless, the FCC did not reject total elimination out of hand.  Rather, it declined to eliminate the rule because the issue had not been raised squarely in the current proceeding.

     The Commission next analyzed the effect that partial elimination of the dual network rule would have on diversity.  It decided that, while allowing merger of one of the emerging networks with one of the Big Four would eliminate an independent national broadcast outlet, preserving the current dual network rule would actually pose a larger threat to diversity of programming than would eliminating the rule. 

     Emerging networks, which could be purchased and maintained by major networks if a portion of the rule were eliminated, would be left to struggle financially if the rule were kept in place.  For example, Viacom Inc., which owns and operates both CBS and UPN, would have to sell UPN to comply with the dual network rule as it existed prior to the rulemaking.  Because UPN is financially troubled and has suffered losses each year that it has been in business, divestiture of UPN by Viacom would almost certainly be a death blow to UPN.   

     Not only would divestiture effectively eliminate UPN as a national broadcast presence, but it could also drive some former UPN affiliates out of business if they were forced to buy more expensive programming in the syndication market.  Thus, diversity could be reduced at both the national and local levels.  Because of the potential negative impact on UPN and local affiliates, the Commission concluded that eliminating the emerging network portion of the dual network rule would promote, rather than diminish, the diversity of voices at the local level.

     Furthermore, the FCC concluded that commonly owned emerging and major networks would have strong incentives to diversify programming offerings, especially by increasing minority programming services.  While a single broadcaster has an incentive to reach the broadest possible audience with one set of programs that appeals to everyone, a single entity that owns two networks has an incentive to attract as many viewers as it can to the overall enterprise by offering different programs that appeal to a variety of viewers.

     The Commission also noted that eliminating the emerging network portion of the rule might very well have a positive effect on news and public affairs programming because emerging networks have not yet been able to absorb the full costs of developing news departments and offering regularly scheduled news programs.  Common ownership could allow emerging networks to offer their affiliates more national news and public affairs programming.

     The Commission determined that the potential efficiencies of vertical and horizontal integration might well benefit viewers and advertisers by reducing costs and promoting diversity, both at the local and national levels.  Accordingly, the agency amended its rules to permit mergers between emerging networks and the four major networks.  The FCC also stated that it would reexamine the part of the dual network rule that prohibits mergers between major networks in a future proceeding, possibly in its next Biennial Review.