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Effort to end the 'UHF discount' would limit growth potential of larger broadcast groups

The never-ending debate over media consolidation this week will focus on an esoteric rule that involving how the FCC calculates whether groups like Sinclair, Univision and Fox meet or exceed caps on station ownership.

Public interest groups say it’s a long-overdue change that reflects the true reach of UHF channels — stations on the dial between 14 and 64. Some media companies, at least privately, say that the proposal risks depressing the value of stations and slowing growth plans.

On Thursday, the FCC is poised to launch a process to change the way it counts a company’s stations against a cap that limits holdings to coverage of no more than 39% of the nation’s TV households. For years, the actual geographical reach of a full-power VHF station (the strongest channels between 2 and 13) was counted against the cap, while only half of the reach of a UHF station was counted. That means that a UHF station in a TV market that accounts for 2% of TV households would be counted as only reaching 1% for the purposes of the FCC calculating whether the station owner is in compliance with the 39% cap.

The UHF discount is a remnant of the days when those stations were considered inferior to VHF outlets because UHF channels were harder to pull in via over-the-air reception. But with the conversion to digital television, those drawbacks have largely disappeared.

The so-called “UHF discount” has allowed such station groups amass holdings well over the 39% cap. ION Media, for instance, owns some 60 stations, reaching almost 65% of the TV audience, according to the industry publication TVNewsCheck, but it stays in compliance with the cap limit because of the UHF discount.

While the agency is expected to “grandfather” existing stations groups such as ION and Univision that otherwise would exceed the cap, an issue is whether pending transactions, like Tribune Co.’s purchase of 19 Local TV stations, also will be grandfathered.

The agency on Thursday would merely be initiating the process for changing its rule, with an ultimate decision to come after what could be a lengthy period for the public and industry to weigh in with comments. But the latest speculation in the broadcast industry is that the agency also would set Thursday as the cutoff date for “grandfathering” in of existing station deals.

The rationale is to prevent a frenzy of acquisitions before the UHF discount is phased out, but what rattles some station executives is that it will freeze buying and selling. “No one is going to do a deal that is going to have to be unwound a year or two from now,” said one media company executive.

Yet putting the brakes on media consolidation is exactly what some groups, like Free Press, say is needed in the current environment. Matt Wood, policy director for Free Press, wrote in a letter to the FCC that it is “high time for the Commission to revisit a rule that allows greater consolidation at the national level based on an obsolete technical consideration.” His org has expressed alarm at the recent buying spree by Sinclair Broadcast Group of a number of stations, including its plans to buy seven stations owned by Allbritton Communications for $1 billion. A spokesman for Sinclair did not return a call for comment.

Scott Flick, partner in the Pillsbury law firm’s communications practice in Washington, said that the recent buying sprees by Sinclair and other major station groups may be what is behind FCC acting chairwoman Mignon Clyburn’s desire to take action now. But such deals, he said, reflect pent up demand after the recession.

With stations grumbling that the agency is, effectively, about to rush a policy through, Flick said that it was “almost inevitable that no matter what the FCC does it will end up in court.”

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