The FCC on Thursday is expected to reinstate the so-called “UHF discount,” a regulatory maneuver that may not draw a lot of attention outside of policy circles, but could be the trigger for a whole series of mergers and acquisitions among station groups.
That action, along with the prospect of deregulatory moves by the Republican-controlled FCC, have Wall Street analysts expecting consolidation among major station groups. Sinclair Broadcasting is reportedly eyeing Tribune Media, and other stations groups, like Nexstar, CBS Corp. and Fox Television Stations, seem to have found a sympathetic ear at the agency to their argument that the current regulations diminish investment.
Broadcasters and public interest advocates see the reinstatement of the UHF discount as just the first major move on the part of FCC Chairman Ajit Pai to relax a number of media ownership regulations, some of which he sees as outdated and unnecessary in a fast-changing media landscape. He has indicated that he wants to look into a cap that limits the number of stations one entity can own, and has been critical of a current prohibition on the common ownership of a TV station and newspaper in the same market.
Pai’s predecessor, Tom Wheeler, first proposed to eliminate the UHF discount in 2013 and won approval for the move in September. When it was adopted in the 1985, it allowed major station groups to count the reach of their UHF station holdings as just 50% of their coverage area. The idea was that UHF transmissions were inferior to VHF, so media firms should get a break when it came to calculating whether their total holdings fell within the ownership threshold.
But cable and satellite adoption, and later the transition to digital television, has eliminated the differences in TV reception.
When the FCC eliminated the discount last year, station groups balked, as some suddenly found themselves exceeding the current ownership cap, which restrict holdings to no more than a reach of 39% of the country. Although the FCC included a provision to grandfather existing holdings, the provision did not apply to situations where a company was sold or to when a media outlet sought to buy additional stations.
“We were in the market to buy TV stations in St. Louis and Columbia, Mo. Those were about to close,” said Brandon Burgess, the chairman and CEO of ION Media Networks, which owns 60 stations, said in a recent interview. When the FCC did away with the discount, “Out of the blue, we were stuck in limbo.”
“The M&A landscape has been on hiatus,” he said.
ION Media Networks, along with Trinity Broadcasting, petitioned the FCC to reconsider its move, and 21st Century Fox has led a court challenge. In January, Burgess and the network’s attorney, former FCC commissioner Robert McDowell, met with Pai and the other Republican on the commission, Michael O’Rielly.
“The removal of the UHF discount without free and unfettered transferability clouds the ability of ION and other similarly situated parties to engage in normal financing, refinancing, recapitalization, and other significant commercial endeavors,” McDowell wrote.
John Orlando, the chief lobbyist for CBS Corp., met with representatives for FCC commissioners in January. According to filings with the agency, he argued that the industry “has been frozen in time for more than three years” as the rule change was being considered during Wheeler’s tenure.
“Time is of the essence in providing broadcasters the ownership breathing room they so desperately need to compete with other video services,” he wrote.
Pai has argued that the elimination of the UHF discount should have been in tandem with considering a modification of the media ownership cap — and he has indicated that the FCC will do just that later this year.
His plans are being met by opposition from some Democratic lawmakers who say that, as traditional as broadcasting may be in a fast-changing media climate, the answer should not be moves that lead to greater concentration of media ownership.
“Further consolidation will ensure that there are fewer independent news outlets serving as a counter-balance to misleading or inaccurate information from other sources,” Rep. Anna Eshoo (D-Calif.) wrote to Pai in a letter last week. “This will not serve the public interest or our democracy well.”
She wrote that if Pai moves the raise or even eliminate the media ownership cap — an idea championed by broadcast groups like Sinclair — it would require an act of Congress. That is a sentiment that is shared even among some Republicans, including O’Rielly, who last year argued that modifcations to the ownership cap were outside the FCC’s authority.
The sole Democrat on the FCC, Mignon Clyburn, is expected to vote against the move to reinstate the discount, and has argued that changes to the ownership rules shouldn’t be made until there is a comprehensive review of how it would impact ownership among minorities and women.
The American Cable Association, which represents smaller- and medium- sized cable operators, has opposed the reinstatement of the cap and expressed concerns that it would expand the leverage that station groups have in negotiations to carry their channels.
A number of public interest groups, including Common Cause and Georgetown Law’s Institute for Public Representation, warn of the FCC reversing itself on the UHF discount.
In a filing with the FCC, Andrew Jay Schwartzman, representing the institute, wrote that if the FCC were to reinstate the discount, it would be “arbitrary and capricious to leave a concededly obsolete and irrational policy in place,” given that the agency may be taking a look at the media ownership cap. He also noted that the FCC currently has two vacancies, leaving open the possibility that a majority would decide to retain the existing media ownership restriction.
In a blog post, Schwartzman also noted the irony in the FCC’s Thursday vote, as the GOP-dominated commission would be beginning “its path to deregulation by reimposing a regulation – the revivified UHF discount.”