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The coming year for broadcasting

by contributors Eric Dodson Greenberg and Matthew L. Gibson, Paul Hastings | Published January 23, 2012 at 1:47 PM

Last year ended with the Federal Communications Commission proposing new regulations that would reach an array of issues affecting broadcasting.

The FCC's proposals range from revisions to the foundational rules governing the cross-ownership of television, radio and newspaper properties to the possibility of new regulation of multistation operational-sharing arrangements.

In a year that saw a long-awaited uptick in broadcast M&A activity and the controversial (or, in some quarters, tantalizing) specter of spectrum auctions, the FCC rulemaking is but one of several factors that signal that the coming year will bring to the broadcasting industry a confluence of political, judicial, regulatory, business and technological currents. Here's what to watch for in broadcasting in 2012:

Spectrum auctions. Predictions for the imminence of incentive auctions -- through which broadcasters may opt to return all or part of their licensed digital spectrum to the FCC in exchange for a portion of the proceeds when the spectrum is auctioned off for broadband and wireless use -- were as rampant in 2011 as they were wrong. But if proponents saw 2011 as shifting the spectrum auction debate from not "if" but "when," they will still need Congress to act. Only then, can 2012 reveal the "how."

The details and mechanics for conducting an incentive auction could drive not only whether (and the degree to which) broadcasters would participate but also M&A valuations. As auction details come into focus, look for spectrum value to become an increasingly important element in station sales as additional buyers come into the market looking to position themselves to participate in a possible spectrum auction.

Media ownership. The FCC has signaled its intent to eliminate the limitation on common ownership of same-market television and radio stations and to revisit rules regulating common ownership of same-market broadcast and newspaper properties. But the question remains whether regulatory changes will lead to marketplace changes.

Under existing regulations, the TV, radio and newspaper industries have become increasingly distinct, making the FCC's proposal far less deregulatory in practice than it may appear in print. But while the FCC's possible relaxation of its cross-ownership rules garnered the initial headlines, a more far-reaching change for broadcast television may lie in a seemingly subtle inquiry by the FCC.

The commission has raised the question whether it should regulate the ability of stations to change network affiliations. Currently, the FCC touches this issue solely when stations change hands. The potential for the FCC to further regulate who can become an affiliate of a top-rated network would interpose the FCC in what has been historically a free-standing commercial and content-based decision between networks and station operators.

Watch for networks and station operators to find common ground on this issue, as both have intersecting interests in preserving contractual and programming autonomy.

Shared services arrangements. The FCC is also raising the question whether it should limit the ability of same-market TV operators to share certain facilities, back-office and programming services through "shared services" arrangements. These arrangements have been key to the survival of some stations in small markets and have allowed others to bring local news offerings to viewers by managing costs.

In other cases, acquisitions by new station owners have only been possible through the reduced capital expenditures made possible by these sharing arrangements.

The debate in 2011 was largely driven by opponents of these arrangements, who painted the issue with the broad brush of an exaggerated nostalgia for a golden age when neither economic conditions nor media fragmentation made such arrangements the business imperative they have become today in many markets.

We expect broadcasters to produce a strong record showing the need -- and value to viewers -- of these arrangements. This is a case where current regulations already balance the mandate for independent ownership with the economic and business pragmatism of shared infrastructure and services.

Broadcast indecency. During the week of Jan. 9, the Supreme Court heard oral argument on a lower-court decision that gutted the FCC's policies regulating broadcast indecency. The justices' decision -- to be issued by midsummer -- could eliminate the FCC's indecency rules entirely or could bring much needed clarity on the standards to which broadcasters must hew.

In all events, the decision should lead the FCC to begin to clear a backlog of more than 1.5 million pending indecency complaints -- complaints that often slow down broadcast license renewals and M&A applications, with many sellers required to place proceeds in escrow with the FCC pending the outcome of its indecency determinations.

NAB at the Supreme Court. The broadcasters' industry group, the National Association of Broadcasters, has sought Supreme Court review of the 3rd Circuit's decision upholding existing FCC rules limiting the ownership of two stations in the same market (so-called duopolies). The NAB's petition creates a potentially fascinating juxtaposition: Just as the FCC is considering regulations that would limit the ability of two same-market stations to even share back-office resources and facilities, it is possible -- if the NAB succeeds -- that the Supreme Court could eliminate the restriction on outright ownership of two same-market stations.

Mobile DTV. The new year will bring a further convergence of traditional broadcasting with new technologies in tablets and smartphones. Sometimes (and mistakenly) dismissed as dinosaurs of the digital age, broadcasters -- through industry groups, like the Open Mobile Video Coalition, and joint ventures, such as the Mobile500 Alliance and Mobile Content Venture LLC and its Dyle mobile DTV service -- are, in fact, pushing the development of new mobile digital-television services and are driving the creation of new media and communications technologies. (On Jan. 4, MCV and MetroPCS Communications Inc. announced the rollout later this year of a new mobile DTV-enabled smartphone.) In 2012, through accelerated trials and expanded test markets, the reality of mobile DTV increasingly will be in hand -- and handsets.

M&A. The announcement of several M&A deals in the fourth quarter of 2011 -- ranging from groupwide deals to a spate of smaller-market single-station deals -- heralds the return of broadcast M&A.

Moreover, as the credit markets improved, a flurry of broadcast finance activity in late 2011 laid the groundwork for the M&A trend to continue with increased momentum in 2012. With valuations established by 2011 dealmaking and political spending in 2012 expected to reach historic levels, look for more station deals in the new year.

The possibility of spectrum auctions may also bring in new players -- thereby further increasing valuations. Beyond station sales, look also for a second level of M&A activity as broadcasters continue to expand and diversify, adapting to a multiplatform digital-media environment through acquisitions of startups and new technologies.

From spectrum to handsets, from regulatory reform to new dealmaking, the new year is poised to bring change and increased activity and vibrancy to the industry, making it worth staying tuned into broadcasting in 2012.

Eric Dodson Greenberg and Matthew L. Gibson are media lawyers at Paul Hastings LLP in Washington.

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