Appellate Court Eases Limitations for Media Giants

February 20, 2002
By STEPHEN LABATON

WASHINGTON, Feb. 19 - A federal appeals court handed a huge victory to the nation's largest television networks and cable operators today, ruling that the government had to reconsider sharp limits on the number of stations a network could own and striking down the regulation that had restricted cable operators from owning television stations.

Unless overturned on appeal the ruling would remove significant impediments that have prevented companies like AOL Time Warner, a big cable operator, from merging with broadcast networks that own television stations. It would also permit big broadcast networks like Viacom's CBS and the News Corporation's Fox, which have bumped against the station-ownership limits, to continue buying stations, unimpeded. [Page C1.]

The decision, which was seen as a setback by smaller owners of broadcast stations and consumer groups advocating more diversity in media ownership, could open the door for a new wave of big mergers in the entertainment and media industries and a continued concentration of power among the biggest media companies.

Executives at big media companies said the ruling was a welcome recognition that the ownership rules had become outdated in an era of media consolidation.

"We're very pleased the court vacated the cable broadcast cross-ownership regulation," said Paul T. Cappuccio, general counsel of AOL Time Warner, which had challenged the regulation in court. "The rule had long ago become an anachronism and did not serve the public interest. It wasn't remotely necessary to protect competition."

But consumer groups expressed alarm at the prospect of further concentration of ownership.

"Comcast and Time Warner will be kicking the tires on NBC before the week is out," said Andrew Jay Schwartzman, president of the Media Access Project, a group that advocates diversity of the airwaves. He said his group would appeal the decision, taking it to the Supreme Court, if necessary. "It's a terrible thing for diversity of viewpoint in general, for programming diversity in particular, and it will increase the price of video programming to the American public if upheld."

The media ownership rules were supported by Democratic regulators appointed during the Clinton administration. But today's court decision continues a series of actions the last year by the courts and by the Federal Communications Commission under the Bush administration to eliminate decades-old ownership restrictions and other regulations that have constrained the expansion of the largest companies in the television, cable and telephone markets.

One regulation addressed in today's decision - a limit on the number of television stations that can be owned by the networks - was sent back to the F.C.C. for reconsideration. Under its current chairman the agency is all but certain to either significantly water down or abandon altogether the rule, which has prohibited a network from owning stations that reach a potential audience of more than 35 percent of households with televisions in the United States.

The court went even further with the other rule, the one preventing companies from owning a cable system and broadcast station in a single market, by simply striking it down.

The ruling came in the consolidation of five separate cases, in which the F.C.C. had sought to defend the ownership regulations. But Michael E. Powell, the chairman of the agency, has long been openly skeptical of those rules. During the Clinton administration, he was one of the two Republican commissioners at the agency who dissented from the F.C.C. decisions in 2000 to leave in place the two regulations that were at issue in today's decision.

More recently, Mr. Powell has questioned the need for the regulations at a time he says consumers have a broad array of choices in news and entertainment. He has repeatedly said the agency needs to provide better evidence to justify the ownership limitations, and he has questioned the need for media concentration rules beyond the traditional restraints found in antitrust law.

Officials at the agency and at the National Association of Broadcasters, which represented the network affiliate stations that lost today, said that they were studying the decision and had not decided whether to seek an appeal.

In a unanimous opinion, three judges from the United States Court of Appeals for the District of Columbia Circuit ordered the F.C.C. to reconsider a TV ownership regulation that had its antecedents in the 1940's and was rooted in the fears of the European experience at the time that the television industry in the United States could come to be dominated by a few powerful interests.

The regulation, the National Television Station Ownership Rule, was intended to "prevent any undue concentration of economic power" and promote diversity of the airwaves by promoting the power of the local affiliate stations that broadcast programming from the networks but are not owned by them. The affiliates have raised concerns the last year that a relaxation of the ownership rules would tilt the balance of power toward the networks - the companies with which the stations must negotiate programming rights and the sharing of advertising revenue. (The New York Times Company owns eight stations in smaller cities around the country - four CBS affiliates, two ABC and two NBC.)

The rule had begun to crimp the expansion efforts of the largest networks, before the appeals court put a temporary stay on the rule last year, pending the outcome of today's case. Viacom's acquisition of CBS last year put that company's market share at 41 percent. The rule has also presented complications for Fox in completing its purchase of Chris- Craft Industries, which would give the company a reach of more than 40 percent of the national audience.

The television rule was challenged by Fox Television Stations, NBC and Viacom.

The second regulation struck down today, the cable broadcast cross- ownership rule, prohibits a cable operator from owning a broadcast station in the same market. In challenging the rule, AOL Time Warner did not identify a particular transaction it had in mind, but noted that the regulation prevented it from acquiring television stations in markets, like New York City, where it owns a cable system.

Whatever the long-term benefits the media giants might gain from yesterday's ruling, the prospect that some companies might go on buying sprees apparently prompted investors to sell their shares. In a generally off day for the stock market, for example, AOL Time Warner shares were down 53 cents, to $25.52. Shares of Walt Disney, which owns the ABC network, were off $1.04, to $22.86. Viacom's stock was off $1.17, to $42.38.

And yet, share prices have been rising lately for smaller companies that own TV stations and might become acquisition targets. The stock of one such company, E. W. Scripps, rose 77 cents today, to $74.02, just below the record high the stock reached only last week.

The opinion in Fox Television Stations v. Federal Communications Commission, No. 00-1222, was written by Chief Judge Douglas H. Ginsburg and joined by Judges Harry T. Edwards and David B. Sentelle. They concluded that the F.C.C. had been "arbitrary and capricious" in the way it had written the regulations and had presented insufficient evidence to justify their utility.

The panel rejected arguments by the networks and AOL Time Warner that the regulations violated their First Amendment rights. But the judges found that the agency had violated the Administrative Procedure Act, which requires that a federal agency provide a reasonable basis for its decisions.

"In sum, we agree with the networks that the commission has adduced not a single valid reason to believe the national television station ownership rule is necessary in the public interest, either to safeguard competition or to enhance diversity," the court said. "Although we agree with the commission that protecting diversity is a permissible policy, the commission did not provide an adequate basis for believing the rule would in fact further that cause."

On the cable rule, the court said that the commission had responded "feebly" to challenges by Time Warner and that the agency had "failed to justify its retention " of the rule "as necessary to safeguard competition."