The End of the Mouseopoly?

U.S. courts made two very smart moves recently. A federal appeals court eliminated the restriction on cable systems owning local TV stations, and also at least temporarily removed the limit on a network's reach. Second, the Supreme Court agreed to decide whether copyrights can go on another 20 years. Though a wash for Disney, it's good overall for investors, citizens, and the Internet.

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By Tom Jacobs (TMF Tom9)
February 25, 2002

U.S. courts are moving to fix some profoundly lousy laws and regulations governing media companies. This is both good and bad news to powerful media companies such as AOL Time Warner (NYSE: AOL) and Disney (NYSE: DIS), but generally positive for investors -- and citizens. Use or reform existing antitrust laws and let citizens do what we always have to do: Work to be properly informed.

The two key moves
First, the federal appeals court in D.C. nixed the long-standing Federal Communications Commission (FCC) restriction on cable and TV station cross-ownership. Less importantly, the court sent back to the FCC a rule limiting a broadcast network from owning stations reaching more than 35% of the national audience. Chief Judge Douglas Ginsburg's opinion is a good, clear read, showing no ill effects from marijuana smoking during his Harvard Law School professor days, the revelation of which killed his 1987 Supreme Court nomination. Investors in media companies should profit if executives pursue sound mergers that produce efficiencies.

Second, the Supreme Court said it would review the 1998 law that extended copyrights another 20 years. The Sonny Bono Copyright Term Extension Act added two decades to Disney's Mouseopoly and gave other copyright holders a similar new lease. If the Court buries the Act, it's a bonus for the Internet, creative expression, and wealth creation.

These are all good moves.

FCC hindered deregulation
The Telecommunications Act of 1996 sought to deregulate radio and TV broadcasting and cable. Congress required that the FCC review all of its ownership rules every two years to determine whether they still were "necessary in the public interest" -- the broad legal standard governing the FCC's authority. At issue for the appeals court was the 1998 FCC review that left two rules standing, to the chagrin of AOL Time Warner, Rupert Murdoch's News Corp. (NYSE: NWS), Disney, and others.

Hot cross ownership
In retaining the cable/broadcast cross-ownership rule ("CBCO" rule), the FCC prohibited a cable television system from owning a TV station in the same local market. Actually, the FCC uses the technical language that the cable system can't carry a signal of a station it owns locally, which amounts to the same thing. The reason for the rule was to prevent cable systems from favoring their own stations at the expense of others, thereby reducing viewpoints and competition. Congress repealed the law prohibiting cable-broadcast cross-ownership, but the FCC did not repeal its own regulation. Cable and broadcast companies sued. Just one reason is that AOL Time Warner wants to buy local broadcast stations in New York City.

The court vacated the rule, finding that the FCC hadn't proved reduced viewpoints or competition. The court said that direct broadcast satellite (DBS) provided enough competition for cable systems and TV stations, and the FCC failed to consider that the increased TV stations provided sufficient diversity of viewpoint.

At first glance, this could mean that cable systems and broadcasters merge. Large companies such as AOL, AT&T (NYSE: T), and Comcast (Nasdaq: CMCSK), among others, could gain synergies by joining broadcast and cable ad sales in local markets. Investors in those companies might not want a stampede, though, and prefer executive caution. The potential buyers have huge debt, depressed stocks, and not enough cash to pull off sensible major acquisitions right now.

How big is your audience?
The other part of the ruling sent back to the FCC its rule forbidding a network from owning TV stations that reach over 35% of the population (the network television station ownership, or "NTSO" rule). The NTSO rule directly affects at least two big media giants -- Viacom (NYSE: VIA.B) and Rupert Murdoch's Fox Entertainment Group (NYSE: FOX). Viacom bought CBS and now reaches 41% of the audience, but didn't have to divest any stations pending outcome of the appeal. The FCC approved News Corp. and Fox's purchase of Chris-Craft Industries and its stations, but with conditions aimed at curbing the merged company's 40% reach.

Instead of agreeing with broadcasters that the NTSO rule violated the first amendment -- and forever prohibiting an unconstitutional restriction -- the court took the usual tack that the FCC didn't adequately prove that the rule maintains a diversity of viewpoints available on the airwaves and promotes competition among broadcasters. The rule returns to the FCC, which can attempt to justify it anew.

A laissez-faire FCC
Don't count on it. The Commission could always raise the 35% national audience ceiling to a higher number, but the issue is whether it can justify any restriction at all. That was hard enough on appeal for the Bush Justice Department, but it may be impossible for pro-deregulation Chairman Michael Powell whose views as a Clinton-era FCC member were adopted by the court.

Expect instead that Viacom, News Corp., and Disney will be able to acquire more broadcast properties if they want, such as small-to-midsize players Belo (NYSE: BLC), Hearst-Argyle (NYSE: HTV), Meredith (NYSE: MDP), Sinclair (Nasdaq: SBGI), and Scripps (NYSE: SSP). The Tribune Company (NYSE: TRB) is now freed to leverage its broadcast properties by moving into cable.

Sonny Bono and Mickey Mouse
After Congress passed the Sonny Bono Copyright Term Extension Act in 1998, work created for hire and owned by corporations earns a 95-year (75 plus 20 added by Sonny) copyright, while work created by individuals is copyrighted for the life of the author plus 70 years (50 plus 20).

The Bono extension joined others that disturbed the 150-year slumber since the first grant of 14 years with a 14-year extension during the life of the author. That was deemed long enough to stimulate creativity and reward creators, but short enough to allow works to enter the public domain and benefit others. Not anymore, to some. The extension was strongly favored by companies like Disney. Disney has justifiably profited from its own treatments of works in the public domain such as Victor Hugo's "The Hunchback of Notre Dame" and Hans Christian Andersen's "Little Mermaid," but sought to prevent others from doing so with its own creations, such as Mickey Mouse, seemingly forever.

Future of the Internet
Court watchers say the smart money's on Disney and Mickey losing this one, but it's much bigger than Disney getting 95 or 75 years on its 1928 Mickey Mouse copyright. Leading the effort to overturn the law is Cyberlaw expert, Stanford law professor, and Microsoft (Nasdaq: MSFT)-antitrust case special master Lawrence Lessig. In his most recent book, The Future of Ideas, and the appeals court brief he argues that copyright extensions and intellectual property protection for software code, for example, are stifling the growth of the Internet and creative expression. As information on the Web proliferates, the expanding web of intellectual property restrictions actually chokes off creativity and future new business opportunities by imposing the burden to track down and pay more copyright holders for longer terms. 

Disney investors may gain from the appeals court ruling and lose if the Supreme Court goes Lessig's way, but the latter result almost certainly means more overall wealth creation.

Diversity of opinion and our nation's strength
Yes, there is a concentration of media ownership, and people are right to question both competition and diversity of viewpoint. But it's not good for investors or the country to arbitrarily assume that this or that percentage media reach presumes anticompetitive behavior. We've got antitrust laws. Have the guts to use them or not, but don't go in the back door with blanket FCC restrictions.

The diversity/concentration of viewpoint argument is fundamentally a sham. Whether we got better news from Walter Cronkite or Huntley & Brinkley than today with watered-down news from a zillion sources, a citizen has always had the responsibility to be informed and that has always required consulting diverse sources. Yet it has never in history been easier to find them than on the World Wild West -- the Internet -- provided you can cough up $499 for a box, a few hundred for a monitor, and change for the monthly Internet Service Provider fee. If the Supreme Court heeds Lessig on the Sonny Bono Act, it will eliminate one obstacle to disseminating information and spreading robust, informed democracy.

That's it for Monday. Stay Foolish this week, and if you want robust, informed speech, look no farther than our own discussion boards (subscription required, 30-day free trial).

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Speaking of the Olympics, Tom Jacobs (TMF Tom9) wonders if you've seen the Mormon temple in Maryland -- and the "Surrender Dorothy!" graffiti on the highway bridge as the temple appears in view. He owns no stocks mentioned here, as revealed in his profile. The Motley Fool is justifiably proud of its disclosure policy.