Reflections on the FCC'S Recent Approach to Structural Regulation of the Electronic Mass Media

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I. INTRODUCTION

Today's media marketplace showcases the rapid development of the new medium of the Internet, the consolidation of old, established mass media, and the combination of the two. The merger of CBS and Viacom represents the latest and biggest in a series of "old media" combinations. These consolidations would not have been possible without the deregulatory turn in mass media policy that began with the Fowler Commission in the Reagan era and was codified in the Telecommunications Act of 1996.

This deregulatory turn and the consolidations it has permitted have led to a public debate about the Federal Communications Commission's (FCC's or Commission's) role in industry structure. Starting with the shared premise that the FCC is taking an increasingly market-facilitative role, commentators have applauded or criticized the impact of that approach on the mass media. This Essay seeks to put the Commission's current structural approach in fuller perspective. It contends that instead of taking a single, deregulatory course, the Commission is engaged in a multipronged approach to structural regulation of the mass media. This multivalent design has a deregulatory component, a regulatory counterweight, and a spectrum policy aspect. The regulatory counterweight in turn has two elements. One is explicit FCC rules that limit deregulation. The other element is voluntary public interest commitments by the regulated industries in response to FCC-articulated concerns. This Essay identifies the hard questions that face both sides of the existing regulatory debate and, having provided an alternative account of the FCC's strategy, also addresses the viability of the Commission's multipronged approach itself.

II. THE FCC'S STRUCTURAL REGULATIONS

The FCC operates under the extremely broad statutory mandate of regulating broadcasting in the public interest, convenience, and necessity.(1) While the agency has imposed some direct content regulations from time to time(2), it has been primarily active in adopting structural regulations.(3) Over its regulatory history, the Commission has endorsed ownership prohibitions both within and across traditionally distinct media.

Within broadcasting, for example, the FCC adopted local anticoncentration rules limiting multiple station ownership in individual markets(4) and national multiple ownership rules limiting the total number of stations allowed for any single entity.(5) The Commission also adopted a broadcast licensing approach in which comparative hearings among mutually exclusive broadcast license applicants would be resolved by reference, among other things, to the diversity in the various applicants' ownership of other media interests.(6)

In a parallel to its structural regulations for broadcasting, the FCC also adopted horizontal ownership restrictions in the cable context. As a result of its findings of increasing cable concentration in 1990(7) and pursuant to the requirements of the Telecommunications Act of 1996 (1996 Act),(8) the Commission adopted rules prohibiting any one entity from having an attributable interest in cable systems reaching more than thirty percent of cable homes passed nationwide.(9)

The Commission justified these ownership-regarding regulations as principally designed to prevent concentration, enhance competition, and promote diversity of voices.(10) On the Commission's view, diversity of outlets is in the public interest both because it will prevent the creation and exercise of market power and because it is likely to lead to a diversity of content and views.

The agency also has a history of cross-ownership limitations across industries--restricting or prohibiting common ownership of broadcast networks and cable companies,(11) cable systems and broadcast stations,(12) telephone and cable,(13) and newspapers and broadcast stations.(14)

However, starting even before the passage of the 1996 Act, but certainly since then, the Commission has taken what appears to be a deregulatory turn in its structural regulations.

Regarding licensing, the 1996 Act extended broadcast license terms(15) and effectively eliminated the Commission's substantive comparative renewal process(16) In lieu of comparative hearings, the Balanced Budget Act of 1997 amended the Communications Act to authorize the FCC to use competitive bidding procedures to resolve most initial licensing proceedings involving mutually exclusive applications for commercial broadcast licenses.(17)

As for broadcast ownership regulations, the deregulatory trend commenced in the 1980s. Industry arguments persuaded both Congress and the FCC that the relevant market for purposes of electronic media was the local market and that there would be no particular economic harms from allowing geographically dispersed radio and television stations to be owned by the same owners.(18) Accordingly, the Commission has made step-by-step upward adjustments to its national multiple ownership rules. Now, courtesy of the 1996 Act, there are no numerical limits on the number of radio stations a single entity can own across the country.(19) That has enabled recent development of extremely large radio station groups.(20)

On the local front, the 1996 Act had already relaxed radio multiple ownership rules even in local markets depending on the size of the market and the number of other media voices.(21) The Commission had been issuing waivers of its "one-to-a-market" and "duopoly" rules in the television context.(22) In August 1999, the Commission further revised its local television ownership rules in order to reflect changes in the media marketplace.(23) It relaxed the television duopoly rule--under which one entity could not own two television stations with Grade B signal contour overlap.(24) It also radically modified the one-to-a-market rule, under which one entity could not own radio and VHF TV stations in the same market.(25) In place of the old rules, the Commission adopted minimum "voice count" floors in local markets--the only exception to which is a broadcast owner's offer to buy a failing or failed station in the market.(26) The Commission's rationale for this move was that a "rule based on the number of independent voices more accurately reflects the actual level of diversity and competition in the market."(27)

In sum, the FCC's recent relaxation of its ownership rules has been designed to provide clear, "bright line" tests--"commonsense rules that recognize the dramatic changes [in] ... the media marketplace" --in order to "provide broadcasters with flexibility to seize opportunities and compete in this increasingly dynamic media marketplace ... [and] help preserve free local broadcast service."(28)

The Commission is still engaged in a biennial review of its remaining ownership rules, pursuant to its statutory mandate. That pending proceeding will address, inter alia, whether the agency should relax its newspaper/broadcast cross-ownership policy and increase its broadcast audience reach cap.(29) And, of particular salience to the current CBS/Viacom merger proposal,(30) the Commission's biennial review is considering revision of the remaining dual network prohibition.(31) In addition, there will be a de facto deregulatory effect if the Commission accedes to broadcast parties' requests for extensions of time to comply with ownership rules.(32)

With regard to cable horizontal ownership rules, the Commission did not explicitly change the limit from the current rate of 30%. However, in a recent rule, the agency changed the method by which the horizontal ownership cap is to be calculated.(33) Because the new rule focuses only on a cable operator's actual subscribers as a percentage of the whole multichannel video programming market (rather than just the universe of cable), the actual effect of the calculation method is to raise the allowable audience reach from 30% of current cable subscribers to 36.7% of current cable subscribers.(34) The Commission also repealed the minority control allowance which, under the old rules, had allowed cable operator's to have ownership interests in up to 35% of the cable market so long as 5% of its systems were controlled by minorities.(35)

As for cross-industry entry barriers, the Commission--through Chairman Kennard in particular--has staked much of its structural regulatory policy on the removal of barriers to entry across traditional industries in light of technological convergence.(36) This is in keeping with the 1996 Act, which eliminated network-cable cross-ownership rules, allowing one entity to own both.(37) The 1996 Act also excised rules hampering cable-telephone cross-ownership.(38)

III. Two CLASSIC CRITIQUES FOCUSING ON THE FCC'S DEREGULATORY APPROACH TO INDUSTRY STRUCTURE

The Commission's structural rules--both traditional and revised-have been subjected to two principal models of critique. One model--the "market failure" approach--criticizes the Commission for not having achieved adequate access and diversity of viewpoints through its regulations and for having unduly succumbed to a flawed market ideology in its regulatory philosophy regarding the mass media.(39) Critics from this vantage point decry the deregulatory direction of the Commission on ownership and structure issues.(40) On this view, the agency's approach to mass media mergers accounts neither for market failure nor for the harmful effects of excess consolidation on diversity and free democratic discourse.

By direct contrast to the market failure critique, a number of media theorists (including Commissioner Furchtgott-Roth) mount a market-based, "regulatory failure" challenge to the Commission's structural approach in the mass media context.(41) Some of these critics, like Commissioner Furchtgott-Roth, go so far as to say that the FCC should "not have structural ownership regulation."(42) The market-oriented critics contend that it is bad policy--and potentially unconstitutional to boot--to end-run constitutional limitations on content regulation by using structural proxies designed to achieve indirectly what they could not have permissibly mandated directly.(43) These critics argue that the Commission's structural and ownership regulations have not been more successful achieving their goals than the unregulated market would have been.(44) Instead, the regulatory failure theorists point to a history of industry capture pursuant to which the Commission has consistently stifled innovation in order to protect the economic power of incumbent regulated technologies.(45) They propose that the Commission (or even just the Department of Justice) enforce only competition-enhancing, antitrust-type rules to promote the development of the electronic media.(46)

IV. CHALLENGES TO THE TWO MODELS OF CRITIQUE (THROUGH A CBS/VIACOM LENS)

Both the market failure and the regulatory failure critics agree that the Commission's current structural rules are not quite good enough. Their debate is whether the Commission should go even further in the direction of structural deregulation or retrench by returning to a regulatory path. Those promoting mergers and joint operations within and across formerly separate industries claim that the government should cede to the market in the organization of the electronic media industry. The market-oriented critics of the Commission argue that the agency's remaining fidelity to its structural regulations constitutes misplaced loyalty to a legacy system of regulation unnecessary--or even harmful--in today's environment. Whether arguing that they need deregulation to compete against more powerful market actors (particularly in a global arena) or claiming that deregulation will sweep away unnecessary obstacles to the efficient allocation of resources, these critics urge the Commission to do away with its industry-specific ownership roles.

Broadcasters, for example, argue that the days of free over-the-air broadcasting are over if the Commission does not further reduce or eliminate its multiple ownership roles.(47) They contend that the ability to consolidate is their only bulwark against the competitive pressures of cable and the other (increasingly viable) information and entertainment resources available to the public. On this view, it is only the synergies and economies of scale and scope generated by size that will allow for the increasingly beleaguered over-the-air broadcast medium to remain vital. Taking advantage of such synergies should not be seen as harmful, proponents say, especially so long as the combinations are analyzed in the context of the increasingly broad market in which modern media operate.(48)

There is obviously much to be said for efficient operations resulting from economies of scope and scale. Indeed, given the particularities of the electronic media, it is well to remember broadcast economists' prediction that consolidation will at least in some circumstances lead to more rather than less diversity in programming.(49) It may be that trying to structure broadcasting along a model of perfect competition among atomistic, independent actors is--as one deregulatory theorist argues--"neither possible nor desirable."(50) Yet the extreme consolidations occurring in the industry raise important questions. In their very ambiguity and complexity, these developments pose challenges for market proponents.(51)

For example, the CBS/Viacom(52) merger (even without consideration of the dual network implications) presents complexities. A merger of this scale creates an opportunity efficiently to promote advertising across multiple media formats under one roof. Doubtless, a combined CBS/Viacom can more efficiently market its news resources across outlets that would not be available to CBS alone. The economies of scale, captured by this combination can lead to cost savings more productively spent on programming.

On the other hand, an efficient advertising market created by such a merger may crowd out smaller, independent media that lack such advantages to offer advertisers. Moreover, the very scale of advertising opportunities offered by the combined entity may promote a homogenization of programming across disparate media outlets. Consolidation in particular areas--such as newsgathering and production--may undermine independence in the media's press function.(53) The concern for news operations is in turn two-fold. The obvious point is that sharing of newsgathering and production operations is likely to reduce coverage of different events, to downplay differences in judgments about newsworthiness, and to minimize the possibility of different spins on news.(54) Moreover, common news operations for large umbrella media entities with corporate parents may well increase pressures on news divisions to promote--or at least not interfere with--the corporate parent's profit interests.(55)

Finally, the combination of Viacom's Paramount studios with the CBS network may lead not so much toward investment in new, high quality programming as to the development of a series of captive outlets for the entities' existing content.(56) Indeed the consolidated entity's ability to prefer its own content may discourage independent investment in content production.(57)

A parallel complexity is associated with the potential for CBS/Viacom to control two separate broadcast networks. Currently, although not evenly matched, CBS and UPN are competitors. Because of Viacom's stake in UPN, an FCC decision to waive its dual network prohibition is necessary to permit the combined entity to own both networks. Industry expectation is that such a waiver is likely to issue. This would reduce the independent voices in the broadcasting marketplace. One could argue in favor of the waiver, however, by adhering to a broader market definition in which the two broadcast networks would constitute a small percentage of available voices. Or, one could seek to justify permitting the dual network ownership on the ground that UPN is a weak sixth network that may well otherwise fail.(58) Even if UPN survived as an independent network, its combination with CBS would provide it with resources to strengthen its participation in the market. On yet the other hand, refusing a dual network waiver would compel CBS/Viacom to release the UPN network to an independent owner who might increase diversity.(59)

Finally, the sheer size of the merged CBS/Viacom entity could exacerbate consolidation among other media participants by accelerating competitors' perceptions of the need for countervailing size. This in turn worries observers who focus on the media's role in the democratic process. Those who are concerned about the increasing consolidation of ownership in the electronic media ask regulators to look at the changing structure of the industry as a whole (rather than at each merger as a separate and individual event).(60) They also argue for a more traditional definition of the relevant market for the assessment of concentration and market power. They point to the potentially harmful bottleneck effects on diversity of programming of having step-by-step consolidations of distributors and content creators and owners. A concentrated information system is particularly likely to reflect inequality in the distribution of economic power, on this account. Critics of consolidation also suggest that concentrated information systems will likely produce different--more mainstream and dissent-avoiding--information than decentralized systems.(61)

Market-oriented theorists respond that the public interest and democratic discourse are more likely to be served by competition as measured under antitrust principles of general application rather than by FCC rules favoring arbitrary ownership percentages designed to achieve the Commission's view of diversity. Arguments that the structure of the mass media should be regulated only by the application of antitrust rules of general application--rather than specific FCC ownership rules--should be addressed carefully. It is particularly difficult to apply antitrust concepts of product markets and cross-elasticity of demand in the context of electronic media. And, apart from the issue of advantages of industry-specific regulations applied by an agency expert in the field,(62) the Commission has always taken the position that its ownership regulations are designed to promote both competition and diversity (rather than competition alone). The degree to which diversity of ideas is fully addressed by antitrust norms of economic competition alone is a disputed question.(63)

Those who mount a market challenge to continuing FCC structural regulation of mass media also rely on the First Amendment. An underlying principle of the market challenge to the Commission's structural regulations is that the agency's underlying viewpoint diversity rationale for regulating industry structure is constitutionally suspect.(64) These …