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Media ownership reform: Caught between an FCC rock and a judicial hard place

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Media ownership reform: Caught between an FCC rock and a judicial hard place

This is the first article in a two-part series on the future of the FCC's media ownership rules. Part 2, which focuses on steps that Congress and the courts could take with regards to the rules, will be posted on Dec. 14.

Broadcasters have been fighting for decades to roll back the FCC's media ownership rules, which limit cross-ownership of newspapers, TV and radio stations in the same market.

With the prospect of a Republican-controlled FCC in 2017, many believe the political climate will soon favor such reform. In the weeks since the Nov. 8 U.S. election, broadcast stocks have soared, with the SNL Kagan Broadcast Index up nearly 18%, even as the FCC's broadcast incentive auction has flagged.

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"The time for realistic ownership rules for broadcasters has come. And we're cautiously optimistic that the new [Trump] administration will agree with us," said National Association of Broadcasters spokesman Dennis Wharton in an interview.

According to various industry observers and legal experts, there are reasons for such optimism as President-elect Donald Trump's administration and a new Republican-controlled Congress take office in January.

Republicans Ajit Pai and Michael O'Rielly, who already serve on the FCC, have been highly critical of the media ownership rules, and any new commissioner appointed by Trump is expected to tilt the majority in their direction.

"It's fair to expect the next commission's view on media ownership will be much more de-regulatory than the Democratic administration's has been," said Ari Meltzer, an associate with Wiley Rein LLP, in an interview.

But Pantelis Michalopoulos, a partner at Steptoe & Johnson LLP, noted that Trump's own views on the media ownership rules remain largely unknown.

"I think it is dangerous to speculate that the media ownership rules will be loosened and therefore dangerous to invest based on that expectation," Michalopoulos said in an interview, adding that he sees an unresolved tension between the GOP's historic preference for less regulation and the antipathy the President-elect has shown toward media consolidation.

During his campaign, Trump said his administration would block AT&T Inc.'s planned purchase of Time Warner Inc., arguing the deal would result in "too much concentration of power in the hands of too few." He also said his administration would look at breaking up the already merged Comcast Corp. and NBCUniversal Media LLC.

There is a difference between the mega-deals Trump referenced and the consolidation of broadcast stations, but it is widely agreed that Trump's views on media ownership remain somewhat of an enigma.

"Trump has not made communications policy a big focus of his campaign or of his policy statements. So any assumptions about Trump's views on media ownership are merely speculative," Meltzer said.

But for Christopher Terry, assistant professor at the University of Minnesota, the bigger hurdle is not Trump; it is the Third Circuit Court of Appeals, which has repeatedly found the FCC's media ownership rules to be flawed.

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The court's involvement with the rules traces back to 2004, when it ruled on a challenge to commission's 2002 review of its ownership rules. In that review, the FCC had developed an analytic tool called the Diversity Index, one use of which was to establish markets where TV-newspaper mergers would be allowed without any review. The index was widely criticized, with Terry calling it "largely illogical" and "a mathematical mess."

"People challenged this action from both sides of the equation," he said.

The legal challenges culminated in a decision from the Third Circuit to remand the rules back to the agency. That remand that has yet to be resolved, meaning the FCC's media ownership rules remain in the Third Circuit's jurisdiction.

Another challenge was launched after the FCC completed its 2006 quadrennial review, though that case was not heard by the Third Circuit until 2011. The court found one of the major short-comings to the review was "inadequate data," especially with regards to the FCC's databases on minority and female ownership.

The FCC had attempted to give preferences to certain "eligible entities" in line with its statutory obligation to promote minority and female broadcast ownership. But the court ruled the FCC's definition for eligible entities was "arbitrary and capricious," noting, "The Commission referenced no data on television ownership by minorities or women and no data regarding commercial radio ownership by women. This is because, as the Commission has since conceded, it has no accurate data to cite."

Once again, the court remanded the media ownership review back to the agency.

After that decision, the quadrennial review process broke down. The FCC never completed its 2010 quadrennial review, instead rolling it into the 2014 review. The 2014 review was only just completed this year, when the FCC voted 3-2 in August to largely keep all of its existing media ownership rules in place.

"This was a completely perfunctory rulemaking by the FCC without any serious review," the NAB's Wharton said of the FCC's August decision.

When asked about the process, Democratic FCC Chairman Tom Wheeler said during a May press conference that it had been a long and difficult effort that spanned both Republican and Democratic administrations.

However, Commissioner Pai said at the time that updating the media ownership rules to reflect modern media consumption habits should be relatively simple.

"Deciding whether or not the Topeka Capital-Journal and [Topeka CBS affiliate] WIBW can collaborate is just so obsolete a conversation that I can't even really believe we're going to expend a tremendous amount of effort figuring whether to retain those types of requirements. It's a complete waste of time," Pai said.

There is widespread consensus on some potential reforms, such as the elimination of the newspaper/broadcast cross-ownership ban, said the University of Minnesota's Terry. The cross-ownership rule, written in 1975, prohibits common ownership of a daily newspaper and a full-power broadcast station in the same market.

With a Republican FCC majority, Terry said the commission should have no trouble voting to eliminate that rule. But he worries the FCC once again will not have the data to support its overall quadrennial review.

"The FCC can't act on these things until it can answer this remand from the Third Circuit. And that remand requires that for whatever policy it implements or retains, there is empirical evidence to support it," Terry said, adding that thus far, the evidence seems lacking.

"Commissioner Pai is right — it's not hard for the FCC to come up with something. But it is hard for the FCC to come up with something that can be sustained on judicial review," he said.