FCC dawdled as radio grew

Introduction

The Federal Communications Commission knew as far back as 1998 that the way it measured radio markets was deeply flawed and could lead to the creation of behemoths like Clear Channel Communications, but failed to act in the face of industry pressure and bureaucratic inertia.

The result is a radio industry where Clear Channel and other radio broadcast companies own far more radio stations in individual markets across the United States than was intended by Congress, despite years of warnings by the FCC‘s own staff.

The FCC finally passed rules on June 2, 2003, meant to fix the problem, but only after well-publicized concerns that broadcasters wield near-monopoly power in certain markets that endangers free speech and public safety. What’s more, the new rules contain large concessions to industry and face a challenge in Congress.

Radio has been dubbed the “canary in the coal mine” by critics of the FCC’s June 2 decision to loosen ownership rules in other forms of media and has become a poster child for what can go wrong when rules restricting media ownership are removed.

The limits

Under federal law, there’s a limit to how many stations a radio broadcast company may own in a single market, based on a sliding scale. In the largest cities, with markets of 45 or more stations, one company may own eight stations. On the opposite end of the scale, in a market with 14 or fewer stations, one company may own no more than five stations.

But those limits have been far exceeded in dozens of cities across the United States, according to a new Center for Public Integrity study (Please see “Big Radio Rules in Small Markets“) and other sources. Although these might appear to be violations, broadcasters have broken no law because the system used by the FCC to define radio markets allows companies to own a lot more stations than Congress may have intended.

Prior to 1996, a national cap on ownership prevented consolidation within the radio industry. The Telecommunications Act of 1996, a far-reaching rewrite of communications law touching on everything from local telephone competition to the V-chip, changed all that.

Included in the sweeping act was a little-publicized measure intended to aid the floundering radio industry. At the time, a single broadcast company was allowed to own no more than 40 stations nationwide.

The act loosened restrictions at the local level and eliminated the national ownership cap altogether. The law led to a frenzy of acquisitions in radio and steadily escalating mergers between competitors.

When the law was enacted, there were approximately 5,100 owners of commercial radio stations nationwide. By November 2001, the number had fallen to 3,800 owners, according to the FCC.

During the acquisition and merger boom, the FCC relied on something called the “contour method” to determine the size of radio markets. The commission determines the size of the market by looking at “mutually overlapping” radio signal contours. The method is extraordinarily complex, and few outside the FCC, media law firms and the radio industry actually understand it.

In a nutshell, the contour method, in some cases, vastly overstates the size of a market, thus allowing broadcasters to own more stations than the counting method would seem to allow. Pine Bluff, Ark., population 83,000, was cited by the FCC as an example of the problem. Pine Bluff has 11 area radio stations, meaning the maximum number a company can own is five. At the same time, however, the contour method understates some companies’ ownership because it splits the town into three separate markets. This allowed a single company to own more than five stations, yet stay within the rules because they were in separate markets.

The most notorious example is Minot, N.D., where Clear Channel owns six of the city’s eight stations. The company was sharply criticized when the lightly staffed stations failed to answer the phones from emergency workers during an ammonia leak and warn the public.

The incident became a rallying cry for anti-consolidation activists and placed U.S. Sen. Byron Dorgan, a Democrat from North Dakota, squarely in the middle of the debate. Dorgan is a member of the Senate Commerce, Science and Transportation Committee which oversees the radio industry and has spoken out against Clear Channel’s domination in his home state.

“I think these issues, including the anhydrous ammonia accident, ought to persuade us to be very concerned about absentee ownership (and) concentration of ownership,” Dorgan told National Public Radio’s “On the Media.” “The public airwaves are extraordinarily valuable and we have licensed them to be used by companies, and over time the usage has changed very substantially. I think the public is not getting the kind of benefit from it that they used to get.”

Problems well known

It was no secret at the FCC that the system for measuring markets was a bad one. In August 1998, former commissioners Gloria Tristani and Susan Ness said so in a joint statement. They warned it would be “entirely possible that one entity could own all of the radio stations that serve a particular community” under the rules.

Ness says that trying to get the system changed was like “hitting up against a brick wall.”

“Everyone in the market knows how many stations are really in the market, and everyone knew the FCC’s definition was a joke,” she told the Center. “It was totally absurd to have the definition remain intact.”

At the time Tristani and Ness issued their statement, consolidation in the radio industry was under way, but it had far from peaked. In October 1998, Broadcasting & Cable magazine reported in its annual survey of the radio industry that Clear Channel owned 453 stations at the time. Today, the company owns about 1,200 stations.

The concerns about the contour method extended to FCC staff and beyond.

The 1998 biennial review of broadcast ownership rules (which the FCC didn’t publish until May 2000) warned that the radio market method was “illogical and contrary to Congress’s intent” and was liable to produce “unintended results.”

An FCC “notice of proposed rulemaking” published in December 2000 echoed that assessment: “Our methodology sometimes leads to results that are completely at odds with commercial market definitions and economic reality.”

What’s worse, the report noted, it created a loophole station owners could take advantage of to buy more stations than the law intended. “Our methodology may encourage applicants to structure transactions to fragment what are commercially considered single markets into a number of smaller markets,” the report reads.

Radio industry resistance

Despite the strong indictment of the market definition method, there was still no official vote to change the rules.

Former commissioner Ness says that no action was taken because of comments filed by the radio industry on the proposed rule change. “The only people who commented were the people whose ox was going to be gored,” she said.

Nearly a year later, on Nov. 8, 2001, the FCC issued yet another notice of proposed rules which contained many of the same criticisms, but was also not acted upon.

The FCC finally voted to change the rules last June 2 to reflect a new market system based on Arbitron boundaries, which just about every radio station in the country relies on for basic day-to-day operations, like setting advertising rates. Arbitron is to radio what Nielsen is to television.

Despite Arbitron’s wide use and acceptance in the industry, the radio lobby opposes the change.

In a May 29, 2003 letter to FCC Chairman Michael Powell, National Association of Broadcasters Senior Vice President and General Counsel Jack Goodman argued that the adoption of an Arbitron-based system “would result in far more anomalies and unpredictable or unjustified results than the current contour based system.”

Goodman contended that many of the arbitrary results are “the result of manipulation of Metro borders by Arbitron subscribers”—a surprising argument to make considering that the radio broadcasters who make up a substantial portion of NAB’s membership are also Arbitron subscribers.

The NAB has sued over the change.

“We think it’s unfair and there’s no justification to change the market definition from a contour to Arbitron based definition,” said NAB spokesman Dennis Wharton. “These are radio companies who have played by the rules set by Congress and the FCC for years, and it’s akin to changing the goalposts in the middle of the game.”

When the FCC finally voted on June 2 to accept Arbitron as the new method for defining markets, it contained the harshest language yet regarding the contour method, saying it created a “perverse incentive” for broadcasters to skirt the rules to get bigger and bigger.

Clear Channel played up the decision as if it were a major blow to its interest. In truth, two major concessions from the commission might just help the company further consolidate its standing as the industry’s dominant player.

That’s because, first, the FCC is allowing Clear Channel to keep all its stations rather than force it to sell off stations to reach compliance once the markets are redefined. As a result, Clear Channel will have a federally sanctioned competitive advantage in markets where it does business, without having to worry about competitors building radio clusters of the same size and scope.

Second, the new rules include non-commercial stations in the market counts, greatly expanding the size of each market universe and raising the limit on how many stations a company can own.

(Clear Channel failed to return several calls seeking comment for this report.)

But the industry may experience some rough times ahead.

Since the June 2 vote, there has been a tremendous backlash against further consolidation in the broadcast industry in general and against radio in particular.

Senate Commerce, Science and Transportation Committee Chairman John McCain has submitted a proposal that would remove the grandfather clause and force Clear Channel and others to sell off non-complying stations.

His amendment, in addition to a number of others that seek to throw out much of the FCC’s June 2 decision, will be debated in the coming months.