Many people think of the Federal Communications Commission as the government group that decides how much of which body parts can be shown on prime-time network broadcasts or as the organization that fines radio hosts over raunchy content. The FCC is in charge of those things, but it also sets the rules as to how many local television stations can be owned by a company in a single market.
Monday the group took steps to close a loophole that had allowed the big broadcast companies -- including Gannett (NYSE:GCI), Media General (NYSE:MEG), and Sinclair Media (NASDAQ:SBGI) -- to effectively own more than one TV station in a local market. Currently the FCC does not allow the owner of a station that is among the top four highest-rated stations in a local market from owning a second station in the top four, but getting around that rule is easy.
These deals made to get around the law -- which are known as joint sales agreements or JSAs -- work as follows: big Company A owns Station X, a top four station. Company A wants to buy Station Y, also a top four station in that same market, but the FCC doesn't allow that. To circumvent that Company A creates another company that only exists on paper -- call it Company Sham. Company Sham buys Station Y and makes an agreement with Company A in which Company A does all the work (and receives all the benefit) in running Station Y. On paper Company Sham owns Station Y but in reality all the benefits of ownership go to Company A, which effectively has circumvented the FCC.
Some JSAs vary a little -- there are JSAs that only involve ad sales and there are legitimate ones -- but the FCC wants to eliminate the use of JSAs to get around the ownership rules.
The law the FCC is changing did everything but allow technical ownership of two top four stations in a market and the loophole is as silly as a husband putting a shared asset -- like a house -- in his wife's name. He still lives there, still benefits if it's sold, but legally he does not own it.
What did the FCC do?
The FCC decided that JSAs being used as described above effectively creates ownership and it will consider a company an owner of a station if it has a JSA that allows for sale of more than 15% of the ad time on a particular station. If companies are using these agreements to get around the rules about owning more than one top four station in a local market -- and they most certainly are -- the FCC ruling will theoretically force them to sell.
That could take some stations out of the hands of big media companies and put them back into local ownership. It might allow for some interesting media combinations as assets that would not previously have been sold might have to be put on the market. Given the sorry state of many local newspapers there might be some television stations up for sale that could be combined with a local newspaper.
Imagine if The Boston Globe, which has faced major troubles along with the rest of the newspaper industry, could be combined with one of Boston's top four local stations? The local news synergy might be good for both entities, unlock savings, and increase competition. With The Globe being owned by billionaire John Henry, who has shown a willingness to spend money to support locally owned journalism, it's not a crazy scenario.
Still the FCC is giving companies two years to comply and while it will consider waiver requests, they will be "considered on a case-by-case basis, must show that strict compliance with the rule is inconsistent with the public interest," so the bar is being set high.
The big media companies are not happy
The National Association of Broadcasters, which is largely comprised of the type of big media companies being targeted with this ruling, is not happy about the closing of the JSA loophole.
"For a decade, Republican and Democratically controlled FCCs have approved JSAs, which allow free and local TV stations to survive in a hyper-competitive world dominated by pay TV giants. That model is now declared illegal, based on the arguments of pay TV companies whose collaborative interconnect advertising sales practices make JSAs seem pale by comparison," NAB Executive Vice President of Communications Dennis Wharton said in a statement.
And while the FCC contends that this move -- along with a related rule announced the same day about how television stations can negotiate retransmission fees with cable, satellite, and telco providers -- should lower or at least stabilize prices, the NAB does not believe local TV stations should be blamed for that in the first place.
"We would also note that broadcasters are not responsible for higher pay TV bills. Pay TV companies have been raising rates more than twice the rate of inflation for the last 20 years, according to Consumer Reports. The notion that a punitive crackdown on local TV stations will lead to lower cable rates is simply not credible," Wharton said.
It is tough to imagine that these changes will lower prices for consumers. They might lead to more locally owned stations but in many cases there won't be efficient matches like The Globe scenario suggested above and new owners will have to incur significant new costs. It's also questionable as to whether there are enough individuals or companies out there with the financial means to take on these theoretically soon-to-be-for-sale television stations.
Will consumers benefit?
While the FCC says it's doing this for consumer-driven reasons it's very debatable if the rule changes will have the desired effect. The moves could increase local ownership and create jobs. They could also lead to stations going out of business or different giant corporations buying them up. Increased competition is great, but not every market is likely to be able to support four separate stations using four separate staffs. That could hurt local programming as the big companies that used to be able to split expenses over multiple stations will be forced to rein in costs.
It makes sense to close this loophole. If a company should be allowed to own more than one top four station in a market that should clearly be the law and not accomplished through a backdoor.
The FCC should carefully look at cases where an exemption to the rules makes sense. The public does not benefit from stations being forced by economics into running cheap programming or not existing at all because they aren't financially viable. Companies should also not be forced to sell stations at below-market rates to comply with the law (it's hard to negotiate a good deal if there is a limited buyer pool and that pool knows the law requires you to sell).
These moves could be good for the public -- certainly better than the FCC worrying about wardrobe malfunctions -- but they must be implemented carefully with a strong eye toward what benefits each market.
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Daniel Kline has no position in any stocks mentioned. He worked at The Boston Globe prior to John Henry buying it The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.