Members will hear testimony on evidence of concentration in various media markets and appropriate regulatory limits on ownership. Senator McCain will preside. Witness list will be announced at a later time.
Mr. Victor B. Miller IV
Witness Panel 1
Mr. Eli M. Noam
Chairman McCain, Senator Hollings, Senators, ladies and gentlemen, I am grateful to join you in discussing the important issue of media concentration and ownership rules. Let’s start by agreeing that we all share an intense desire not to let the diversity of media voices be strangled by a few big companies. The ownership of news and entertainment media is important to the health of democracy. But the debate over it must be healthy, too, and relate to facts rather than be driven by some dark fears. When it comes to concentration, views are strong but numbers are weak. We’ve got at Columbia perhaps the best data set on media ownership and market shares, covering about a hundred information sector industries, and going back about 20 years. We are therefore able to provide some empirical findings on trends, and we ran last night some simulations into the future that might be helpful to your considerations. The concentration of broadcast television is the most contentious issue in the debate. So let’s look at the facts. For local TV station ownership, the national share of the top 4 firms about doubled, from 12% in 1984 to 21% in 2001/2. By the standards of the US Justice Department, it is still firmly in the range of “unconcentrated”. This is not to say that those guidelines should be the governing standards for media, but they provide some relative yardstick. If we let the top 4 firms be permitted to reach 45% instead of 35% of national population, as the FCC ruled, then the 4 firm concentration rises to 27%. At the same time, local concentration of broadcast TV, based on our analysis of 30 representative markets, declined rather than increased, as many have feared, due to the shift of viewership away from the affiliates of 3 networks to a wider range of broadcast stations. Whereas the largest 4 stations in a local market accounted for 90% in 1984, that number had declined to 73% 20 years later. Furthermore, most of that decline was in the past 5 years. In terms of HHI, it fell from 2460 to 1714. (And I am not even including cable channels in that analysis, since they do not tend to provide their own news. If we included them, the market share drop would be much higher.) In contrast, concentration grew considerably for radio stations, where the ownership rules until the 1990s kept an industry of 12,000 stations highly fragmented, with any firm from owning no more than a few stations. Today, with no national ownership ceilings, we’ve gone in the opposite direction, and the top 4 station groups account for 34% of stations by revenues, more than four times the 8% of 2 decades ago. Arguably, local concentration is the most important issue to worry about. For radio, it has grown from an average of 53% of the audience held by the top 4 station owners in each local market 20 years ago to 84% in 2002, well into the range of “highly concentrated industries”. (HHI=2,400) For multichannel TV (cable and satellite), the 4-firm concentration rose nationally from 21% to 60%. But just as important is the extent of local concentration. Here, cable used to be for a long time the only option, wielding considerable gatekeeper power. Today, with satellite TV a viable option for national programs, cable’s share has declined to a still considerable 78% and keeps sliding. Local concentration of media has actually been highest for newspapers. While newspaper national concentration is moderate but rising (27%, up from 22% twenty years ago), its local concentration levels are astonishingly high. Whichever index one uses, local newspapers are at the top of the list for local media concentration, with the top firm on average accounting for a market share of 83%, 3 % higher than 20 years ago. To get an overall picture, we can report the aggregation of these various trends for 4 local mass media, TV, radio, newspapers, and local magazines and periodicals. We use here the HHI index, for aggregation purposes, and weigh them by the FCC’s and Nielsen Media Research’s determination of people’s usage of the medium as a source for local news and current affairs. This composite local HHI is shaped like a big U. From 1984 to 1996, it declined somewhat, and subsequently rose to a level somewhat higher than 20 years ago. Now the question is, how would the new FCC rules affect media concentration, nationally and locally? We did last night some preliminary calculations. 1. If we extend the reach of the top 4 firms to 45%, the 4-firm concentration index rises from 21% to 27 %, as a worst case scenario. The HHI would rise from a very low 152 to a still low 227. 2. The effect of duopoly and triopoly relaxation would be to raise overall local media concentration of TV, newspapers, radio, and magazines from today’s HHI of 1865 to 1933. This is an increase, but not a huge one. 3. In contrast, if we add to this the effect of newspaper-TV cross ownership, if following the FCC rule, and assuming a worst case scenario—that every one of the large TV stations buys a newspaper, until none are left in that city, is quite large. It would rise from a composite local media HHI of 1865 today to 3551. This would be a substantial increase. Therefore, I would be troubled by the impact of such a newspaper -TV cross ownership rule on local concentration. But I would not be troubled by the increase of national TV concentration due to the rise in the national ceiling to 45%. On the local duopoly, the numbers indicate somewhat of an increase in concentration, but not a sharp one. At this point, you probably want to know what the proper limits on ownership should be. There are basically 3 ways to determine this. One is the incremental approach: gradually raise ownership levels and see what happens. And if the sky does not fall in, you loosen up a bit more. The problem with this pragmatic approach is that if things go wrong, it might not be possible to turn things back. Just look at what happened in Italy where the media winner became a political power. The second approach is to set a number of limits for each media industry, largely unconnected to each other. That’s basically the system we have now. And a third approach, which I would support, would be to have an overall local measure that takes into account all local media of TV, radio, newspaper, magazines. Because the number of newspapers in a city makes a difference, for example, to the question of how many TV stations another company should be able to own. How high should such a composite local HHI be? Partly this is a policy question for you, not for an economist. What are we comfortable with? We could look at any past year and decide that its media concentration has been comfortable in democratic and economic terms, and maintain that level. That would be the HHI that would be a threshold, and an acquisition that would go over that line would be scrutinized closely. If we weigh the different local media firms by the attention to their news, as given by the FCC, then the average local media HHI, over the past 20 years, has been about 1708. Such a local media HHI level would realistically be different for different city sizes. Large cities are able to sustain a larger number of voices, and their often greater diversity and number of issues also requires them. The larger the city in population, the smaller the media concentration should be expected to be. So we can actually establish a formula, with the product of population and HHI being some constant K. It would be a benchmark. How large should it be? If you determine that in the largest 20 of media markets the number of voices should be 15-- TV stations with news programs, radio news and talk stations, newspapers, city magazines, local cable news channels. That translates to an HHI of about 700. If the market is medium sized, to maintain the same constant K the HHI could rise to 1,000, or about 10 equal sized voices. You’d get that from about 5 TV companies, 3 radio companies with news content, one newspaper and a local magazine. With this approach, as new media emerge and smaller media grow, or some of the larger firms stay stable in size, the others can own more, since its not their size or holdings that is constrained but only the overall market concentration. This would not be a hard-and-fast rule, but a threshold for greater scrutiny. It would also let local communities take a look at their own media situation and find out whether they stand. If you are interested in this approach, I will be glad to flesh it out. None of this should suggest that local media concentration is low or that there is no need for vigilance. But it’s quite another matter to call it a burning crisis and a relentless trend, as many have done in the heat of the battle. That has not been the case, and, without the newspaper-TV cross-ownership rule, is not likely to become one. Senators, thanks you for your attention.
Mr. Victor B. Miller IV
I am Victor Miller, the broadcasting Equity analyst for Bear Stearns. I have covered the broadcasting industry for 16 years in lending and equity research. I appreciate the opportunity to provide my perspective of the Federal Communications Commission’s June 2, 2003 Media Ownership Rulemaking. We believe that the FCC sought to achieve two basic changes in its June 2, 2003 media ownership rulemaking: First, we believe the FCC’s rules sought to provide opportunities for local TV, local radio and local newspapers to respond to the competitive pressures of a consolidating cable business and large national media players. Second, we believe that the FCC sought to address concerns regarding the long-term health of “free-over-the-air” TV. Ultimately, we believe that the FCC responded to mandates placed upon it by Congress and the Courts and changes in the media marketplace. Explicitly by: • The Telecommunications Act of 1996, which requires the FCC to “repeal or modify any regulation it determines to be no longer in the public interest” as part of its Biennial review; • Pressures created by the D.C. District Court’s decisions to remand the national TV station ownership and TV duopoly rules back to the FCC and to create policy consistent with the D.C. Court’s decision to strike down the most offensive local cross-ownership rule, the cable (multiple system operator)-broadcast rule. • Concerns relative to the longer-term health of “free-over-the-air” television. Elaborating on the last point, I believe that there are five factors that could affect the long-term viability of free TV. One, TV is a robustly competitive business, with 10 broadcast networks, 1,372 commercial TV stations and 287 national and 56 regional cable networks . Intense competition has taken its toll on “over-the-air” broadcast ratings and ad shares. Two, local TV players are facing a consolidating cable business; in 15 of the top 25 media markets, one MSO controls at least 75% of the local market’s wire-line subscriber base. Increasing MSO concentration could adversely affect local TV broadcaster’s retransmission discussions with MSOs and will create meaningful competition to local TV’s ad dollars and programming franchises (local news, sports). One cable operator already captures more ad revenue than does ABC’s owned and operated TV group, we believe. Three, some estimate that devices with ad skipping technology could reach sufficient mass by 2005, threatening free-TV’s only revenue stream, advertising. If TV’s single ad-only revenue stream broke down entirely, monthly cable subscriber fees would have to increase by $46 per month to replace lost ad revenues. Four, the broadcast TV network business is becoming less and less profitable. From 2000 to 2002, we believe that the “big four” (ABC, CBS, NBC and Fox) networks generated only $2 billion in profits on approximately $39 billion in revenue, a 5% margin. Excluding the most profitable network, we believe that margins would fall to 1%. Five, because the TV business has significant levels of fixed costs, declines in revenue can have negative effects on cash flow. For example, in 2001, local TV station industry revenues fell by approximately 15% , but cash flow plummeted by 25% to 35%. On the newspaper front, we believe that the FCC acknowledged the reality that the industry had not seen any deregulatory relief in 28 years. There are 17% fewer daily newspapers and 9% less daily circulation in the industry since 1975 despite 45% growth in households since 1975. Newspaper’s share of measured media has declined to 30% in 2002 versus 45% in 1975. Newspapers have lost nearly 50% of their highly profitable help wanted ad business in the last three years. Given these operating pressures combined with the deregulatory tone set by the statute and the courts, we were not surprised to see newspaper-broadcast cross-ownership relief, an upward revision in the national TV station ownership rule and changes to duopoly rules. But, in general, Wall Street regarded the relief as modest. First, the only national rule changed by the FCC was an upward revision in the national TV ownership rule. If one believes that the long-term preservation of “free-over-the-air” TV is important, then the FCC’s decision to raise the ownership cap is an essential piece of the broadcast-TV preservation puzzle. Networks essentially cross-subsidize poor network economics by owning more profitable local TV stations. The ability for networks to at least have the option to increase station ownership is important to preserve broadcast TV’s “ecosystem”. Networks and their local stations are married to the same terrestrial system. Healthy broadcast networks beget healthy local TV stations and vice versa. Having said this, there are many important checks and balances that are of great concern to local broadcasters in their relationship with the networks and we continue to hope that these will be resolved. Second, there have been some concerns voiced with the concept of duopolies and triopolies. Currently 80% of duopolies support the Univision, Telefutura, WB, UPN and independent TV stations. And, except for one market, obvious triopoly candidates capture less than 1% of local viewing and ad share in the other ten potential triopoly markets. Triopoly rules will likely create a new viable TV voice or preserve an existing one. Third, turning to the radio rule, we believe that the new geographic market based rules that is part of the June 2 Order, tightens potential local radio ownership. Our review of radio’s 286 metropolitan areas suggest that there are 214 non-compliant radio stations in 109 different radio markets owned by 47 different operators. We approximate that 94 of the 214 non-compliant stations are owned by 36 private radio groups and that these non-compliant stations represent 15%-plus of the stations of 13 of these private operators’ groups. This reality combined with the fact that radio groups were legally assembled under the Telecom Act was the guiding force for the FCC’s decision to “grandfather” non-compliant stations, we believe. Fourth, there has been some concern with the level of deal-making that may be done after these rules go into effect. We believe that the FCC’s new rules would lead to modest incremental deal activity: • The increase in the cap is unlikely to lead to meaningful deal-making opportunities; ABC, thus far, has shown little interest in expansion, Fox seems focused on satellite TV, and NBC’s and CBS’s affiliates are owned by companies committed to broadcasting for the long run and which are unlikely to sell. • Changes in radio rules probably will reduce merger and activity in radio relative to the old rule regime. M&A activity had already slowed; only 8% of all post-Telecom Act radio deals were done in the last three years. • We believe that large national multi-media players are not interested in newspaper assets and that newspaper ownership will remain unchanged in the vast majority of the top 100 markets. • Deals that create undue levels of concentration will likely run afoul of the FCC’s Diversity Index or Department of Justice standards. From a market perspective, radio stocks have declined nearly 40% since January 1, 2000 and local TV stocks have declined by 36%. In both cases, local TV and local radio industry revenues in 2003 will not reach those achieved in 2000. What is often lost in the recent debate of the FCC’s new media ownership rules is that many aspects of Congress’ Telecom Act of 1996 and other FCC policies have been quite successful and have served the public interest. Driven by the FCC’s 1993 retransmission/must-carry rules, Congress’ Telecommunications Act of 1996 and duopoly rules adopted in August 1999, the average home can view 150% more broadcast networks, 87% more local TV stations and has 725% more viewing options on a national level now than in 1980. While duopolies seem controversial, they have been instrumental in creating new broadcast networks; 80% of existing duopolies and local marketing agreements support emerging networks such as Telefutura, WB and UPN. And the FCC’s 1992 radio duopoly rules combined with the Telecom Act of 1996 helped permanently preserve the radio business; 50%-60% of radio stations’ recorded operating losses in 1991. And radio can now compete more effectively with all other media. There has been some considerable debate on the presence of minority operators in the broadcast business. Fortunately, some progress is being made again, thanks to Congress’ Telecommunications Act of 1996 and more robust capital markets. Many companies, such as Radio One (urban broadcasting), Univision (Spanish-language), Hispanic Broadcasting (Spanish-language), Entravision (Spanish-language), Spanish Broadcasting (Spanish-language), Radio Unica (Spanish-language), Telemundo (Spanish-language), Salem Broadcasting (Religious) and Paxson Communications (Religious/Family Values) took advantage of the Telecommunications Act of 1996, accessed the capital markets and have assembled significant broadcast platforms. The enterprise value of these aforementioned companies currently stands at approximately $20-plus billion. Most were not public companies or were a fraction of their size in 1995. Having said that, Chairman McCain’s bill should continue to build momentum in minority access to media assets. Lastly, I want to state that I hope I can be of help to this Committee. I have had 16 years of experience covering media and I have been fortunate enough to be ranked #1 in the Institutional Investor poll during the last two years and to be ranked as the #1 most trusted analyst in the Greenwich Associate survey last year. I hope you will get the sense that my obligation is to provide investors with unbiased views and that investors have acknowledged that effort. I was asked to testify in front of the Chairman Kennard-led Commission in January 1999 and by the Chairman Michael Powell-led Commission in February 2003 and have been asked to testify in front of the Senate Commerce Committee here today. Again, I hope I can helpful in today’s discussion. Thank you, Mr. Chairman and distinguished Senators of the Commerce Committee for allowing me to submit this written testimony.
Mr. Philip Napoli
I would like to emphasize that the analysis of the media ownership rules should place a high priority on the diversity and localism principles and their role in assuring the effective functioning of our media system and our democracy. While economic analysis is vital to guiding this ownership inquiry, it is also the case that the unique characteristics and functions of media industries require that the analytical perspective extend beyond economics. The key question in this case is whether ownership limits are necessary to preserve and promote the diversity and localism principles. In recent years, efforts to answer this question have focused on exploring the relationship between media ownership characteristics and media performance. I wish to stress that we do not have, at this point, a very thorough understanding of this relationship. I think it is very important that the Committee recognize that this is a relatively new, and, consequently, not particularly well-developed area of inquiry. It has only been within the past decade or so that policymakers’ predictive judgments regarding the relationship between media ownership and media performance have been called into question (particularly by the courts). As a result, policy analysis has not focused on such questions with the intensity that they deserve and this field of inquiry is not nearly as well-developed as traditional economic analysis. I think this point is fairly well illustrated by the 12 studies commissioned by the FCC in conjunction with the media ownership proceeding. A close reading of these studies, and of outside parties’ subsequent analysis of these studies, showed that, for the most part, those studies that focused on economic issues such as market concentration were quite rigorous from both a theoretical and a methodological standpoint. In contrast, much of the research that addressed non-economic policy concerns, such as diversity and localism, was less sophisticated and less rigorous from both a theoretical and a methodological standpoint. The FCC’s Diversity Index provides another example of this point. FCC Chairman Powell undertook the admirable, though difficult, task of creating an “HHI for Diversity.” The HHI (Herfindahl-Hirschman Index) used in economic analysis is a measure that helps policymakers determine when a market has become concentrated enough that there is a legitimate danger of anticompetitive behavior. This index is the outgrowth of a body of research that demonstrated that HHI scores were effective predictors of anticompetitive behavior. Thus there is a body of knowledge that gives meaning to an HHI of 1800. In contrast, the FCC’s Diversity Index has no comparable underlying body of knowledge. As a result, what does a Diversity Index score of 1800 really mean? It is really nothing but an arbitrary measure without an accompanying body of research that tells us at what point on the index particular harms associated with a lack of diversity arise. If the new Diversity Index had been demonstrated to be a useful predictor of when the performance of media outlets in particular media markets declines in some way, then it would be of comparable analytical utility to the traditional HHI. Hopefully, in the future we will be able to develop a sufficient body of knowledge to have an HHI for Diversity that can stand alongside the traditional HHI. However, we are not there yet, and to treat the current Diversity Index as if it has all of the analytical power of the traditional HHI would be a mistake. The question, then, is do we know enough at this point to feel confident that the relaxation of ownership rules will not result in significant harms to our media system – particularly in terms of both the diversity and localism principles. My own work that has addressed the relationship between ownership characteristics and media performance has not yet produced results that I would say are conclusive. For instance, one study found evidence that locally-based television stations provide more public affairs programming than stations that are not locally based. This same study did not find any evidence that the size of a station group owner bears any relationship to the amount of public affairs programming that an individual television station provides. These findings represent only one fairly superficial mechanism for investigating the relationship between ownership characteristics and media performance and they certainly don’t answer the difficult question of whether a 35% cap or a 45% cap, or, for that matter, a 25% cap is most appropriate. Nor has the broader research on the relationship between media ownership and performance provided a consensus that can definitively guide policymaking. In conclusion, we need to recognize that diversity and localism likely have value that may not lend itself to empirical analysis that is on par with economic analysis. When we talk about diversity and localism we are ultimately talking about preserving particular decision-making structures – structures in which a greater number and diversity of individuals or organizations make determinations as to the information and entertainment available to us, and in which the individuals and organizations making these decisions are more closely tied to the communities they serve. These structures have value independent of the extent to which they measurably affect content. This value extends from the relationship between these structures and a media system that reflects and embraces First Amendment and democratic principles. To weaken these structures on the basis of the results of economic analysis and the results of fairly undeveloped systems of diversity and localism analysis strikes me as potentially dangerous.
Mr. Mark N. CooperDirector of ResearchConsumer Federation of America
Mr. Chairman and Members of the Committee, My name is Mark Cooper. I am Director of Research of the Consumer Federation of America. I greatly appreciate the opportunity to appear before you today to discuss media ownership rules. This is the single most important issue confronting the Federal Communications Commission (FCC) because it deeply affects the fundamental structure of the forum for democratic debate in our society, in addition to affecting an extremely important area of economic commerce. For two years we have urged the FCC to engage in rigorous market structure analysis and to adopt a high First Amendment standard for its media rules. It has completely failed to do so. The FCC has adopted a remarkably narrow view of the public interest under the Communications Act and abandoned the most elementary principles of market structure analysis. The result is a set of rules that bear no relationship to the reality of American media markets. The FCC’s is wrong on the facts, wrong on the law and the resulting rules are entirely unreasonable. That is why Congress must step in and restore order. THE FACTS ILLOGICAL ASSUMPTIONS IN THE NEWSPAPER-TV RULE The FCC refuses to look at the actual audience of a media outlet in calculating its Diversity Index. The Index underlies the decision to grant blanket approval to TV-newspaper combinations in over 80 percent of all markets where over 95 percent of all Americans live. Refusing to recognize reality leads to absurd results. For example, under the FCC’s analysis, in Tallahassee Florida the PBS station operated by Florida State University, which captures less than 1 percent of the TV audience, counts as much as the number one TV stations, which captures almost 60 percent. Community Newspapers Holdings Inc., which owns the Thomasville Times Enterprise and the Valdosta Daily Times, counts twice as much as the Tallahassee Democrat, even though its newspapers have less than half the circulation. Under the FCC rules, the leading newspaper and the leading television station in Tallahassee would be given “no questions asked” approval to merge, even though the resulting company would have almost 60 percent of the TV audience, 70 percent of newspaper readers and control nearly two-third of the news room staff in the market. The documents I have submitted for the record provide dozens of similar examples in markets of all sizes. These range from New York, where the Dutchess County Community College educational TV station counts more than the New York Times, to Lexington Kentucky, where the Corbin Times with a circulation of 5,000 is equal to the Lexington Herald, with a circulation of 115,000, and even more important than the CBS duopoly, which has over 60 percent of the TV market. UNREALISTIC ANALYSES IN THE TV RULES The TV rules are based on similarly unrealistic assumptions. For example, the FCC campaign to raise the national cap on direct network ownership of TV stations by national networks as a tool to save “free TV” ignores the fact that every one of the broadcast networks is embedded at the core of a vertically integrated television conglomerate. The recent acquisition of Vivendi’s U.S. entertainment assets by NBC means that all five owners of broadcast networks (CBS, ABC, Fox and Time Warner (WB) in addition to NBC) all own film production, film libraries, TV production and cable networks in addition to their broadcast networks. Four of the five own publishing and theme parks as well. The synergies and economic power that result from internalizing production, initial distribution, syndication and repurposing are the hallmark of the television industry in today’s multichannel environment. This integration of production and distribution has been reinforced by legal rights that allow the media giants to gain carriage on cable systems, which have enabled the parent corporations of the broadcasters to capture a large share of the non-broadcast video market. As a result, the network owners have used their cable offerings to recapture between two-thirds and three quarters of the audience they claim to have been losing for over-the-air TV. These five firms and a sixth close ally account for almost three quarters of the TV audience, programming expenditures and writing budgets of the entire industry and own over four-fifths of the prime time shows. More importantly, the five owners of the broadcast networks capture virtually 100 percent of the television news audience. In market structure analysis, five firms, even if they are equal in size, is not considered a large number. In fact, by the Merger Guidelines of the Department of Justice, which have been used for over twenty years to indicate where mergers create an anticompetitive concern, such a market is considered highly concentrated. In economic terms, the national TV market is a tight oligopoly. And, the industry is financially healthy; the FCC’s own analysis said so. Advertising rates are going through the roof. Advertising revenues performed better in the 1990s, the decade when multichannel video was supposed to be undermining broadcasting, than the previous two decades. There is no public policy purpose to be served by allowing these entities to become larger and more powerful in either the national or local TV markets, yet that is exactly what the FCC proposes, allowing the networks to directly control stations that reach an additional 10 million households. The new rules expand the number of markets in which a single entity would be allowed to hold the license for two stations from about 50 to about 150. For the first time, it would allow a single entity to hold the licenses for three stations in one city. THE LAW THE FCC DEFINED ITS FIRST AMENDMENT DUTIES TOO NARROWLY Any discussion of media ownership rules must start from the recognition that, above all, they are based on the First Amendment right of the people to speak. For over sixty years the Supreme Court has expressed a bold aspiration for the First Amendment in the electronic age that rests on two fundamental principles. First, the Court has declared that “the widest possible dissemination of information from diverse and antagonistic sources is essential to the welfare of the public.” Second, broadcast licenses, which create powerful electronic voices, especially for television, are scarce. “Because of the problem of interference between broadcast signals, a finite number of frequencies can be used productively; this number is far exceeded by the number of persons wishing to broadcast to the public.” Therefore, the Supreme Court has repeatedly concluded that there is no “unabridgeable right to hold a broadcast license where it would not satisfy the public interest.” With its most recent rulings on media ownership, the FCC has turned its back on this First Amendment jurisprudence. Instead of accepting the challenge of the Supreme Court’s bold aspiration for the First Amendment to promote “the widest possible dissemination of information from diverse and antagonistic sources,” the FCC has adopted the narrowest vision imaginable. It has declared that it is concerned only with ensuring that ideas can leak out and avoiding “the likelihood that some particular viewpoint might be censored or foreclosed, i.e. blocked from transmission to the public.” If the distribution of media ownership undermines a robust exchange of views, the FCC is unconcerned, declaring: “ Nor is it particularly troubling that media properties do not always, or even frequently, avail themselves to others who may hold contrary opinions… nor is it necessarily healthy for public debate to pretend as though all ideas are of equal value entitled to equal airing.” We do not claim that all ideas are of equal value, as the Commission wrongly implies, but we do insist that in our democracy ideas have an equal opportunity to be heard. By abandoning the bold aspiration for the First Amendment and adopting these remarkably lax rules, the FCC will allow massively powerful owners of multiple media outlets to decide which ideas are broadcast widely and which merely leak out to the public. There is a grass roots rebellion growing against the media concentration that these rules would spawn because the narrow view of the First Amendment adopted by the Commission is offensive to the traditions of vibrant civic discourse that the American people have always embraced. The rules violate the basic tenets on which our democracy stands and on which it has thrived. ANTITRUST PRACTICE IS ILL-EQUIPPED TO DEAL WITH FIRST AMENDMENT ANALYSIS OF MEDIA MARKETS The FCC claims that the confines of its narrow concept of the First Amendment prevent it from using the most fundamental information in market structure analysis, the shares of the firms in the market. Specifically, it has refused to look at the actual, real world audiences of media outlets, claiming that it must treat every outlet as if it had the same audience. By this twisted logic, the Communications Act, which is clearly intended to provide greater protection than the antitrust laws for the public interest in media markets because of their important role in democratic debate, is gutted. Under the FCC’s new standard for the First Amendment, citizens get less protection from media corporations’ accumulation of market power than consumers do under antitrust laws. By the FCC’s own analysis, in over half the scenarios for broadcast-newspaper mergers that it considered the FCC would give blanket approval to mergers that would violate the antitrust Merger Guidelines by a substantial margin. Antitrust law cannot deal with these problems. First, over the past two decades every major relaxation of structural limits on media ownership – deregulation of cable, repeal of the Financial and Syndication Rules, lifting the cap on radio ownership, and the TV duopoly rule –has been followed by a swift merger wave. Although some have argued that antitrust was intended to and should consider citizen issues, antirust practice has moved far toward pure economic considerations. Antitrust is about economic efficiency and profit; the First Amendment as it relates to the media is about understanding and truth. To put the matter simply, antitrust officials do not “do” democracy. As Justice Frankfuter put it almost sixty years ago in the seminal case, “truth and understanding are not wares like peanuts and potatoes.” Antitrust officials can tell you when a merger between TV stations will raise the price of advertising; they do not examine if it lowers the quality of civic discourse. REASONABLE RULES RIGOROUS MARKET STRUCTURE ANALYSIS SHOWS MEDIA MARKETS TO BE CONCENTRATED Over a year ago, the Consumer Federation of America presented a framework for examining media markets to the Commission that would allow it to apply rigorous market structure analysis within a framework of high First Amendment principles. Last spring we presented a detailed analysis of media markets based on traditional economic approach, a thorough review of the First Amendment jurisprudence and the empirical record before the FCC. • Considered as separate products, which the empirical evidence indicates they are, we find that over 95 percent of the newspaper markets, 90 percent of the TV markets and 85 percent of radio markets are highly concentrated by antitrust standards. • Local and national TV news markets are more concentrated than entertainment markets. Although it is difficult to combined different types of media outlets in a single framework, for cross media analysis we treated newspapers and TV broadcasters as dominant co-equals in media markets. TV dominates on the demand-side – being cited by about twice as many people as their dominant source of news. But, newspapers dominate on the supply-side, with almost twice as many newspaper newsroom staff in daily newspapers as there are newsroom staff at broadcast TV stations. Newspapers also produce a great deal more news copy than TV stations and they are frequently the source of ideas for TV news stories. In response to survey questions, 80 percent or more of respondents cite newspapers and TV as the primary source of news and information, particularly about elections. Therefore, we assumed that other sources (radio/Internet/weekly) account for 20 percent. The FCC failed to ask the proper questions and botched the analysis. It vastly overestimated the importance of these sources, giving them a 45 percent weight, almost equal to newspapers and TV. • We concluded that, even by our broad definition, over 90 percent of all media markets in this country are concentrated. • In the handful of markets that are unconcentrated, most could only sustain one or two mergers before they, too, would become concentrated, but the FCC would allow multiple mergers within and across media in these markets. RIGOROUS MARKET STRUCTURE ANALYSIS INFORMED BY HIGH FIRST AMENDMENT PRINCIPLES PROMOTES THE PUBLIC INTEREST Traditional antitrust practice defines a market as concentrated if it is has the equivalent of fewer than 10 equal sized competitors. Because media markets are so vital to democratic discourse, we recommended that the FCC adopt this standard as a bright line test, refusing to approve mergers in concentrated markets or that would create concentrated markets. Public policy should not allow cross media mergers in markets that are concentrated, with an exception for conditions of financial distress or deminus acquisitions. Preserving the institutional independence, competition and antagonism between newspapers and television in every city in America is one of the most critical ways to ensure a robust exchange of views. Public policy should not allow TV-TV mergers in markets that are highly concentrated. When hundreds of millions of Americans who would want a license cannot hold even one, it is difficult to justify allowing media conglomerates to own two, not to mention three in the same market. Given the high degree of vertical integration in the television industry and the penetration of cable by broadcasters, the 35 percent ownership limit, which is actually a traditional antitrust level for monopsony power analysis (i.e. networks as buyers of programming exercising market power over sellers), is generous. In the early 1990s two fundamental public policy changes were made for broadcast television. The Financial and Syndication rules which limited the ability of networks to own prime time programming were repealed and broadcasters were given must carry/retransmission rights. The results are clear. Independent production of prime time programming has virtually disappeared and vertically integrated giants dominate the industry. At this stage of the game, rather than increasing the ownership cap to 45 percent, Congress should be considering whether to drop the cap back to 25 percent, or reinstituting the FinSyn rules. INCONSISTENCIES AND CONTRADICTIONS IN THE FCC ANALYSIS The FCC rules are also riddled with internal contradictions. The FCC justifies getting rid of the ban on cross ownership on the basis of a discussion of the market share, or the “strength,” or “influence” of individual outlets. Yet, when it comes to writing the new rule, it declares that market share, strength and influence do not matter. The FCC defends mergers in its competition analysis, claiming that the production of news programming is difficult and expensive. Then it claims it does not have to consider market shares in its diversity analysis because the production of news programming is easy and cheap. The FCC concludes that the top four local stations and the four major national networks should not be allowed to merge with each other because such mergers would increase economic market power, create dominant firms that are much larger than their nearest rivals, diminish the incentive to compete, and produce little public interest benefit because the merging parties are likely to be healthy and already engaged in the production of news and information products. Every one of these is a valid reason to ban a merger between dominant TV stations and dominant newspapers in the local media market. The FCC failed to apply this reasoning to cross-ownership mergers and ban dominant firm combinations. I am confident that the Court will overturn the rules, but that will only send them back to the agency, which has spent two years misreading the record, misinterpreting the law and mangling the analysis. Congress should take action. The national cap was enacted by Congress. The cross-ownership ban is a bright line test that has been upheld in the courts. The evidentiary record supports both; the Congress needs to do so, as well.