Before the

Federal Communications Commission

Washington, D.C. 20554

+----------------------------------+---+------------------------------+
| In the Matter of                 | ) | MM Docket No. 00-108         |
|                                  |   |                              |
| Amendment of Section 73.658(g)   | ) |                              |
| of                               |   |                              |
|                                  | ) |                              |
| The Commission's Rules -- The    |   |                              |
| Dual Network Rule.               | ) |                              |
|                                  |   |                              |
|                                  | ) |                              |
+----------------------------------+---+------------------------------+

**[NOTICE OF PROPOSED RULE MAKING]{.underline}**

Adopted: June 8, 2000 Released: June 20, 2000

By the Commission: Comissioners Furchtgott-Roth and Powell concurring
and issuing separate statements; Commissioner Tristani dissenting and
issuing a statement.

Comment date: September 1, 2000

Reply Comment date: October 2, 2000

# Introduction

1.  This Notice of Proposed Rule Making proposes the amendment of
    Section 73.658(g) of the Commission's Rules, the "dual network" rule
    applicable to broadcast stations. This rule permits a television
    broadcast station to affiliate with an entity maintaining two or
    more broadcast television networks *unless* the two or more networks
    consist of two or more of the major networks (*i.e*., ABC, CBS, NBC
    and Fox) or one of these four networks and either the UPN or WB
    television network.[^1] As a result of our analysis in our Biennial
    Review proceeding concerning broadcast ownership rules,[^2] we made
    a preliminary determination that the current rule, as a result of
    competition, may no longer serve the public interest. Accordingly,
    we indicated that we would commence this rulemaking proceeding
    proposing to amend the rule by eliminating the portion of the rule
    that precludes the ownership of the UPN or WB networks by the ABC,
    NBC, CBS, or Fox television networks.

# background

2.  As we noted in the Biennial Review Report, the Commission first
    adopted a dual network rule for broadcast radio networks in 1941
    following an investigation to determine whether the public interest
    required \"special regulations\" for radio stations engaged in chain
    broadcasting.[^3] The rule provided that no license would be issued
    to a broadcast station affiliated with a network organization that
    maintained more than one broadcast network.[^4] The Commission
    extended the dual network rule to television networks in 1946.[^5]
    The Commission believed that permitting an entity to operate more
    than one network might preclude new networks from developing and
    affiliating with desirable stations because those stations might
    already be tied up by the more powerful network entity. In addition,
    the Commission expressed concern that dual networking could give a
    network too much market power. The dual network prohibition,
    therefore, was intended to remove barriers that would inhibit the
    development of new networks, as well to serve the Commission\'s more
    general diversity and competition goals.[^6] The dual network rule
    for broadcast television remained unchanged until 1996, when the
    Commission amended the rule[^7] to conform with the provisions in
    Section 202(e) of the Telecommunications Act of 1996.[^8]

3.  Section 73.658(g) sets forth the Commission\'s current dual network
    rule. It directly reflects the provisions of the Telecom Act which
    permit a television broadcast station to affiliate with a person or
    entity that maintains two or more networks of television broadcast
    stations unless such networks are composed of: 1) two or more
    persons or entities that were \"networks\" on the date the Telecom
    Act was enacted; or 2) any such network and an English-language
    program distribution service that on the date of the Telecom Act\'s
    enactment provided 4 or more hours of programming per week on a
    national basis pursuant to network affiliation arrangements with
    local television broadcast stations in markets reaching more than 75
    percent of television households. Section 202(e) of the 1996 Act
    defines a \"network\" with reference to Section 73.73.3613(a)(1) of
    the Commission's Rules. That Rule provides that a network is "any
    person, entity, or corporation which offers an interconnected
    program service on a regular basis for 15 or more hours per week to
    at least 25 affiliated television licensees in 10 or more states;
    and/or any person, entity, or corporation controlling, controlled
    by, or under common control with such person, entity, or
    corporation."

4.  The Conference Report stated that the Commission was being directed
    to revise its dual network rule \"to permit a television station to
    affiliate with a person or entity that maintains two or more
    networks unless such dual or multiple networks are composed of (1)
    two or more of the four existing networks (ABC, CBS, NBC, Fox)
    or, (2) any of the four existing networks and one of the two
    emerging networks (WBTN, UPN). The conferees do not intend these
    limitations to apply if such networks are not operated
    simultaneously, or if there is no substantial overlap in the
    territory served by the group of stations comprising each such
    networks.\"[^9]

# discussion

5.  In the Biennial Report we tentatively concluded that we should
    explore modifying the dual network rule by eliminating the
    prohibition on the ownership of either the UPN or WB network by one
    of the major television networks. We stated that neither competition
    nor diversity issues appeared to warrant retention of the rule in
    its current form.

6.  Our proposal to relax the dual network rule to permit ownership of
    either the UPN or WB network by one of the major networks is based
    on a review of the current economics of the network broadcasting
    industry. The elements of our economic review are briefly summarized
    in the following paragraphs. We seek comment on our view of the
    current economics of network broadcasting both in general and with
    respect to particular conclusions derived from the review.

7.  *Framework*. The dual network rule, as modified as a consequence of
    the 1996 Act, may be viewed as an anti-merger rule that constrains
    the current organization of the network broadcasting industry. This
    constraint on the organization of the contemporary network
    broadcasting industry may result in organizational inefficiencies
    that adversely affect industry performance, including the type and
    quality of network programming available to viewers. One way to
    examine the network broadcasting industry for possible
    organizational inefficiencies is the application of concepts
    developed in the transaction cost economics (TCE) literature.[^10]
    From a TCE perspective, the economic organization of firms and
    industries reflects specific attributes of the contracting process
    between buyer and seller. The following discussion identifies key
    attributes of critical exchange relationships in the network
    television broadcasting industry, e.g., the relationship between
    program suppliers and broadcast networks, and how these attributes
    contribute to the efficiency or inefficiency of existing industry
    organization.

8.  The commercial television network broadcast industry today consists
    of a number of vertically-integrated firms. For example, ABC is
    vertically integrated with Disney as a program supplier; the Fox
    network is vertically integrated with 20^th^ Century Fox as a
    program supplier; and UPN is vertically integrated with Viacom.
    Thus, an economic analysis of the effects of potential mergers
    between the major networks, i.e., ABC, CBS, NBC, and Fox, or
    potential mergers between these entities and an emerging network,
    i.e., UPN or WB, will in many cases involve mergers between
    vertically-integrated firms. To facilitate discussion, the analysis
    decomposes a hypothetical merger between two broadcast networks into
    two parts.[^11] First, we examine the relationship between a program
    supplier and a broadcast network to determine whether vertical
    integration is either more or less efficient than simply negotiating
    an arms-length contractual relationship between the program supplier
    and the broadcast network. The comparative assessment of the
    efficiency of contracting versus vertical integration relies
    extensively on TCE concepts. Second, we assess the effects of a
    horizontal merger between two broadcast networks by relying on
    antitrust measures of market concentration and an analysis of price
    competition in the national market for network television
    advertising. Finally, the gains or losses resulting from the
    analysis of vertical integration are integrated into the measurement
    of the efficiencies or inefficiencies resulting from the horizontal
    merger to determine the overall benefits and costs of a merger
    between two vertically-integrated firms.[^12]

9.  *Overview of the Analysis*. The application of TCE concepts suggests
    that vertical integration between program suppliers and major
    networks may produce substantial economic efficiencies (compared to
    market contracting) that may benefit both advertisers and viewers.
    The analysis of horizontal mergers between broadcast networks
    suggests that the merger of two major networks would adversely
    affect competition in the national network television advertising
    market, while the merger of a major network and an emerging network
    may produce efficiencies benefiting both viewers and advertisers.
    Based on the aggregation of the costs and benefits from both the
    vertical and horizontal components of a proposed merger, the
    analysis concludes that the dual network rule should be retained as
    it relates to mergers between the major networks, but relaxed to
    permit mergers between a major network and an emerging network.

10. *Attributes of Television Network Output*. From an economic
    perspective, firms in the network broadcasting industry, such as
    ABC, NBC, CBS, and Fox, together with their local television station
    affiliates and their owned and operated (O&O) stations, are in the
    business of producing audiences.[^13] Access to network television
    viewers is sold to advertisers that want to reach a large,
    nationwide audience of potential customers. Network advertising
    provides audience reach unmatched by any other broadcasting medium.
    No single cable channel today provides the audience reach of any
    television network. Only network television is a *mass-distribution*
    venue for programming and advertising, notwithstanding the
    continuing erosion of network television audience attributable to
    the growth of cable and DBS viewership[^14] Access to the mass
    audience produced by television networks is sold to advertisers in
    terms of thousands of viewers for a defined interval of commercial
    time, such as 30 seconds.

11. Both a network television program and the over-the-air broadcast
    transmission that delivers the program to viewers have economic
    attributes of a *pure public good*, i.e., a good or service with the
    property that one individual's viewing of the program does not
    diminish the quantity of the program available for any other
    individual who wishes to view the same program.[^15] By contrast, a
    pure private good, such as food, clothing, and many other consumer
    products and services, are "rivalrous" in consumption, i.e., a good
    consumed by one individual is *not* available for consumption by a
    different individual. Thus, a network television program, having the
    property of a pure public good, is not "used up" once it is shown.
    Indeed, the *same* program may be aired repeatedly to the same or
    different audiences without physically "wearing out" the program as
    an asset that produces audiences.[^16]

12. The public good attributes of a network television program imply
    several things about its cost as an audience-producing asset and its
    market value to the program producer and the network that broadcasts
    the program. First, broadcasting a network program represents, in
    substantial part, a *fixed cost* of production for the network with
    respect to the number of viewers produced by airing the program.
    Once the program is on the air, the cost of production for the
    network and its station affiliates is insensitive to the number of
    viewers "consuming" the program. In other words, the marginal cost
    of adding an additional viewer within the signal coverage area is
    zero for both the network and the station affiliate. This attribute
    of network program costs suggests that large audiences are always
    preferable to smaller ones, since a larger audience costs the
    network no more to produce than a smaller one for the same level of
    program quality, and network revenues derived from advertisers
    depend directly on the number of viewers produced. Expressed
    differently, the average fixed costs of production for the network,
    i.e., total fixed cost divided by the number of viewers, declines as
    the size of the audience produced increases in size. To the extent
    that such economies are reflected in the pricing of network
    advertising, then the marginal price of network advertising per
    viewer falls as audience size increases. Given the fixed cost
    attributes of network programming assets and the economies of
    spreading such costs over large audiences, economically-viable
    television networks must be *large* rather than small as measured in
    terms of the number of affiliated stations and the viewers produced
    and sold to advertisers.

13. Second, not only are the costs of network programming fixed, they
    are also *sunk*. Typically, a sunk cost refers to an investment in
    highly specialized productive assets that cannot be redeployed to an
    alternative use. Sunk cost investments reflect *asset-specificity*
    and typically have little or no productive value in any other use
    beyond the intended application. While asset-specific investments
    often facilitate reductions in the cost of production or
    improvements in the quality of output produced compared to the use
    of less specialized assets, they involve substantially higher risks
    of capital recovery compared to non-specialized general purpose
    assets. General purpose assets can be redeployed to alternative uses
    should demand for the asset in its original application decline or
    disappear entirely, while asset-specific investments may become
    worthless. Once created, investments in network programming are
    asset-specific: an action movie targeted to a specific audience
    cannot be redeployed to attract a totally different audience that
    prefers, say, musical comedy. If the targeted audience does not like
    the movie, then much of the investment in the movie by the network
    may be unrecoverable.

14. Third, the public good and cost characteristics of network programs
    result in a multiplicity of rights that can be sold to television
    networks by program producers. Among these rights are the initial
    network exhibition rights; the right to renew those rights
    (options); and the right to earn revenues from the syndication of a
    successful network program, among other future revenue streams. As a
    result, contract negotiations between a program producer and a
    network for the sale and purchase of program rights are extremely
    complex, involving especially high stakes for the incumbent
    television networks. The growth of cable television and DBS have
    substantially increased the number of viewing options for viewers,
    resulting in a steady erosion in the size of audiences attracted to
    conventional, over-the-air network television programming.
    Additionally, program producers now have expanded options for
    selling their programming beyond the networks or through syndication
    to local television stations. Increasingly, the continuing growth in
    cable networks provides significant competition to the incumbent
    television networks as purchasers of television programs.
    Additionally, some program suppliers, such as Warner Brothers and
    Viacom, have decided to integrate vertically into program
    distribution by creating their own television networks. This option
    for program suppliers introduces additional complexity in the
    contractual relationship between program suppliers and the incumbent
    television networks. As a result of these changes in industry
    structure over the past decade, the contracting environment between
    and among suppliers of network programming and the incumbent
    networks is both more complicated than before and somewhat more
    risky for the networks. It is imperative that networks obtain
    quality programming to stem audience erosion while dealing with
    suppliers that now have expanded options for the sale of their
    product.

15. *The Market for Network Programming*. From the business perspective
    of an incumbent television network, programs are a critical input in
    the process of producing a mass audience. Like any business firm, a
    network faces a "make or buy" decision, namely, either make the
    input of production itself or contract with an independent supplier
    to make the input according to specifications established in a
    contract. Prior to the expiration of the Commission's financial
    interest rule in 1995, which prohibited the networks from acquiring
    equity and profit rights in network programming produced by
    independent program suppliers,[^17] the Commission forced the
    network to *contract* with independent program suppliers rather than
    partially or fully integrate vertically with such firms. Following
    repeal of the Commission's financial interest and syndication rules,
    the networks have partially or fully integrated vertically with a
    number of program suppliers. This integration reflects, in part, the
    difficulties in negotiating a contractual relationship with program
    suppliers. These difficulties reflect the peculiar attributes of
    television network output previously described.

16. The economic complexities of contract negotiation between a
    television network and a program supplier may be illustrated by a
    specific example. Suppose a network wants to contract with a program
    supplier for a prime time program series, say, a situation comedy.
    Both the network and the program supplier may be expected to
    approach contract negotiations from a self-interest maximizing point
    of view, although the inherent uncertainties of creating a
    successful program and forecasting audience acceptance probably
    makes it impossible to know what decisions are profit-maximizing. In
    the language of TCE, both parties approach contact negotiations with
    *bounded rationality*, i.e., "*intendedly* rational, but *limitedly*
    so."[^18] As previously discussed, a program, or program series,
    once completed is "durable" and can be rebroadcast as a network
    re-run or put in syndication after its network run. The economic
    life of the program or series cannot be known a priori, ranging from
    months to decades. If the program producer believes that the planned
    program may have a long life in syndication, then the program
    producer may be willing to forego front-end profits in exchange for
    the profits expected to be earned in syndication. The network ,
    however, may have very different expectations about the expected
    life of the program series and its long-term profitability which may
    pose a fundamental conflict to be resolved through negotiation.

17. If the program series becomes a "hit", then the program producer may
    wish to re-open the negotiated contract with the network in an
    effort to obtain a larger share of the anticipated large network
    revenues resulting from the success of the program in attracting
    viewers and advertisers. Since the program producer retains
    substantial control over the creative process that generates the
    programming, including how and when the star talent is utilized in
    the program, the program producer may attempt to "hold up" the
    network by threatening to adjust program quality that may benefit
    the program producer (e.g., altering the compensation of key program
    talent) at the expense of the network (e.g., reducing the value of
    the program as a network re-run). In the language of TCE, the
    program producer may behave *opportunistically*, i.e.,
    "self-interest seeking with guile."[^19] Moreover, both the network
    and the program producer recognize that attributes of contractual
    relationship between the program producer and the network involve
    certain *external effects*, i.e., costs or benefits which may accrue
    to the parties to the contract that are largely outside the scope of
    the immediate transaction. For example, should the network suddenly
    cancel the program series due to poor ratings rather than wait to
    see if the ratings eventually improve, the program producer's future
    revenues derived from its syndication rights may be reduced or
    virtually eliminated. Similarly, the network can vary the audience
    attracted to a network program by positioning the program in its
    program lineup so that it benefits from the audience attracted by
    the program appearing immediately before it. Thus, the network's
    manipulation of its program schedule to achieve its own *current*
    profit objectives will have a significant effect on the *future*
    revenues produced by the program in syndication. If the network is
    unable to capture some fraction of these future revenues, it has no
    incentive to consider the external effects of its program schedule
    decisions and may well behave opportunistically toward the program
    supplier's financial interests.

18. An especially difficult aspect of contract negotiations between a
    network and a program supplier concerns the allocation of the risks
    of program development between the two parties. Given the
    asset-specificity of every network program and the significant
    probability that the program will fail to attract an audience of
    sufficient size to attract advertisers, risk allocation between the
    parties is a difficult issue to negotiate, since attitudes toward
    risk aversion will differ between the network and the program
    producer. The advantages of sharing the risks of multiple program
    production will vary with different program producers and
    networks.[^20]

19. Given the substantial financial risks implied in the production and
    distribution of network programming, both the program supplier and
    the network have a mutual interest in maintaining a mutually
    beneficial, long-term contractual relationship, especially if (1)
    the program purchased is intended as a prime time series; and (2)
    the network and program producer expect to maintain ongoing
    contractual relationships for new programs in the future. Such
    expectations may, in fact, attenuate to some degree the possible
    incentives to pursue opportunistic behavior by either party.
    Nevertheless, writing a contract that resolves inherent conflicts
    between the parties, incorporates the consequences of external
    effects, discourages opportunism, and anticipates many future
    contingencies in the contractual relationship including dispute
    resolution, is both difficult and costly. As suggested by the TCE
    literature, transactions involving substantial asset specificity,
    uncertainty, and frequency may be more efficiently effectuated by
    some other *governance structure* than contracting by two
    independent entities.[^21] Vertical integration of program
    production and network distribution whereby the former market
    transaction is made *internal* to the merged firms under unified
    ownership results in a major efficiency gain, namely, the ability to
    adapt more readily the (internal) relationship between the program
    supplier division of the merged enterprise with the network
    distribution division to unanticipated changes in the economic
    environment. As Williamson explains,

> The advantage of vertical integration is that adaptations can be made
> in a sequential way without the need to consult, complete, or revise
> interfirm agreements. Where a single ownership entity spans both sides
> of the transaction, a presumption of joint profit maximization is
> warranted. Thus price adjustments in vertically integrated enterprises
> will be more complete than in interfirm trading. And, assuming that
> internal incentives are not misaligned, quantity adjustments will be
> implemented at whatever frequency serves to maximize the joint gain to
> the transaction.[^22]

Based on our analysis of the comparative transaction costs of
effectuating exchange between program suppliers and television networks
by market contracting versus vertical integration, we believe that
partial or complete vertical integration between a broadcast network and
a program producer may result in substantial efficiencies that may
benefit network television advertisers and viewers. More specifically,
advertisers may benefit from reduced rates if the efficiencies of
vertical integration are reflected in reduced network costs of producing
a mass audience. Similarly, viewers may benefit from the wider
availability of diverse programming that a network may produce as a
result from having available its own program production capability that
may encourage new but riskier programming possibilities.[^23]

20. *Tendency Toward Network Industry Concentration*. As explained
    above, most costs of producing and distributing programming are not
    sensitive to the number of viewers that actually watch a given
    program once broadcast facilities are in place. In effect, a
    television network *shares* the substantial fixed costs of network
    television programming among the stations either owned by the
    networks or affiliated with the network.[^24] The larger the number
    of owned or affiliated stations belonging to a given television
    network, the lower is the average fixed cost of network programming
    that each affiliated station must recover and, all other things
    remaining the same, the lower is the effective price per viewer for
    an advertiser so long as the network faces some competition from
    other television networks. Given the fixed cost nature of the
    business, larger networks, in terms of the number of affiliated
    stations and viewers, tend to be more economically viable than
    smaller networks.

21. The *number* of economically-viable television networks is presently
    severely constrained by the number of available local affiliates.
    The number of available station affiliates is constrained, in turn,
    by the amount of spectrum the Commission has allocated to broadcast
    television. A network must have a sufficient number of affiliated
    stations so that (1) a large enough percentage of national
    viewership is achieved so that national advertisers can be
    attracted, and (2) average fixed cost is reduced to a point where
    the competitive price of network advertising will produce network
    advertising revenues sufficient to cover the total cost of network
    operations. Television networks today compete in a *national* market
    and need, therefore, an affiliated station in most local markets
    across the country. If stations are unavailable in too many local
    markets, or the available stations have poor signal coverage, then
    the network can neither attract sufficient national advertisers nor
    drive average fixed costs low enough such that competitive rates for
    network advertising will cover total network operating costs. Both
    the fixed cost attributes of network costs and the Commission's
    limited allocation of spectrum to broadcast television present
    obstacles to new broadcast networks.

22. *National Television Advertising Market*. Within the national
    television advertising market that includes national spot sales by
    affiliated and independent stations, a *strategic group* consisting
    of the major networks, i.e., ABC, NBC, CBS, and Fox, can be
    identified.[^25] At present, the network firms comprising this
    strategic group provide the greatest reach of any medium of mass
    communications. Since delivering a mass audience is becoming more
    difficult for all media, media that can still produce mass audiences
    become more valuable. As a result, broadcast networks have achieved
    double-digit gains in revenues in recent years despite their loss of
    audience relative to years past.[^26] The major mobility barrier
    impeding entry into the major network strategic group is the
    availability of affiliated stations. Notwithstanding some growth in
    the number of stations over the last decade, obtaining sufficient
    affiliated stations remains a major obstacle to developing a new
    network that can achieve sufficient national reach to be attractive
    to national advertisers.

23. At present, mobility barriers protecting the major network strategic
    group result in an *oligopoly* of established networks where prices
    for network advertising will also depend on the number of
    networks.[^27] In general, as the number of independently-owned
    networks in the strategic group decreases, the equilibrium price for
    network advertising will increase.[^28]

24. *Economic Effects of Network Mergers*. So long as mobility barriers
    deter entry into the major network strategic group, the pricing of
    network advertising will be sensitive to the number of network
    competitors. Thus, horizontal mergers between the major networks
    will *increase* the unit price of network advertising, all other
    things remaining the same.[^29] Although network advertisers may be
    harmed by such mergers, viewers of network television may benefit if
    the duplication of similar types of network programming is reduced
    and more programming for specialized audiences is offered.[^30]
    Whether the welfare gains to viewers\--if any\--exceed the welfare
    loss to network advertisers is not known.

25. Given our analysis of the potential effects of a merger of networks
    in the major networks strategic group, the dual network rule as
    applied to the four major networks should *not* be relaxed until the
    mobility barriers defending the major network strategic group are
    lowered.[^31] As noted above, the major barrier impeding entry into
    the broadcast networking industry is the availability of affiliated
    stations created by the amount of spectrum the Commission allocated
    to broadcast television. In the near future, we expect that
    deployment of digital television may lower barriers to new broadcast
    networks by enabling broadcast stations to carry multiple program
    streams. Our biennial reviews of the dual network rule will enable
    us to periodically evaluate the impact of DTV on existing barriers
    to new broadcast networks.

26. While retaining a prohibition on mergers between major broadcast
    networks, we believe a merger between an emerging network, such as
    WB or UPN, and a major network may produce net benefits. Such a
    merger may produce significant efficiencies by internalizing the
    contentious issue of program production risk-sharing within a
    vertical relationship. For example, an emerging network acquired by
    a major network provides the major network with an additional
    "window" for the distribution of network programming. In effect,
    this additional window allows the merged network to broadcast the
    same program in different time slots in the same market if both the
    major and emerging networks have affiliates in the same city.
    Alternatively, if the emerging and major network do not have
    affiliates in the same city, then the merged network entity will now
    reach more households than before the merger. In either case, the
    fixed costs of program production are spread over additional viewers
    in different time slots or additional cities. As a result, the
    effective program cost per viewer is reduced in either case.
    Similarly, a network program that fails, or is only marginally
    successful, on the major network's affiliated station might succeed,
    however, when broadcast to the niche audience reached by the
    affiliates of the emerging network. The risks of network program
    development are clearly attenuated for the merged networks as a
    consequence of reaching additional viewers at different times or in
    additional cities or with audience attributes that may differ from
    the mass audience ordinarily targetted by a major network. Moreover,
    since the emerging networks, such as WB, UPN, or Pax Net[^32] are
    *not* in the major network strategic group, there should be little
    or no adverse effect on the price for network television advertising
    as a result of such a merger.[^33] Accordingly, we are proposing to
    eliminate that portion of the dual network that would prohibit the
    merger of a network in the major network strategic group with the WB
    or UPN networks.

27. While we believe that relaxing the dual network rule will result in
    net benefits to both viewers and advertisers as shown by our
    economic analysis, such relaxation of the rule may adversely affect
    our goal of diversity in broadcasting. Clearly, the merger of an
    emerging network with a major network results in the loss of an
    independent network "voice" and thus diminishes source diversity.
    Such a result runs counter to the Commission's long-standing goal to
    foster the entry of additional broadcast television networks as a
    means of promoting diversity.[^34] So long as substitutes for
    network television remained limited, the entry of additional
    television networks was crucial to increasing viewer choices of
    diverse television programming. With the growth of cable television
    networks, direct broadcast satellite services, and the ongoing
    deployment of digital television,[^35] however, encouraging the
    entry of new, over-the-air broadcast networks may have diminished in
    importance relative to twenty years ago.[^36] Moreover, our local
    broadcast ownership rules will continue to ensure outlet diversity
    in local broadcasting markets. In short, circumstances may have so
    changed in broadcast markets that our diversity goals may no longer
    preclude the realization of the beneficial effects resulting from
    the relaxation of the dual network rule proposed in this Notice. We
    seek comment on the possible effects of relaxing the dual network
    rule on our diversity goals and our tentative conclusion that such
    effects are outweighed by the benefits identified in our economic
    analysis.[^37]

28. We invite comment on any or all aspects of our economic analysis of
    the possible effects of relaxing the dual network rule to permit the
    merger of an emerging network with a major network. In particular,
    we seek comment on (1) our analysis of the difficulties of
    negotiating long term contracts between a program supplier and a
    television network; (2) the likely benefits of vertical integration
    between program producers and networks for network advertisers and
    viewers; (3) our application of the concept of a major network
    strategic group; (4) the likely effects on the price of network
    advertising resulting from (a) a merger of incumbent networks within
    the major network strategic group and (b) a merger of a major
    network and an emerging network; and (5) the effects of the merger
    of an incumbent network and an emerging network on a viewer's choice
    of programming options (mass audience vs. niche audience
    programming) and the likely quality of such program options.
    Comments supplying empirical evidence that is consistent or
    inconsistent with our economic analysis will be especially useful.
    Theoretical analysis that further refines our economic analysis or
    identifies critical weaknesses will also be useful.

29. We also seek comment on possible merger conditions that might help
    safeguard our broadcast diversity goals while partially relaxing the
    dual network rule to achieve the potential net benefits identified
    in our economic analysis. Are there conditions that could maintain
    separation between the programming decisions of the two networks
    while still allowing them to achieve the efficiencies described in
    our economic analysis?

# ADMINISTRATIVE MATTERS

30. [Comments and Reply Comments]{.underline}. Pursuant to sections
    1.415 and 1.419 of the Commission's rules, 47 C.F.R. §§ 1.415,
    1.419, interested parties may file comments on or before September
    1, 2000 and reply comments on or October 2, 2000. Comments may be
    filed using the Commission's Electronic Comment Filing System (ECFS)
    or by filing paper copies*. See Electronic Filing of Documents in
    Rulemaking Proceedings*, 63 Fed. Reg. 24,121 (1998).

31. Comments filed through ECFS can be sent as an electronic file via
    the Internet to <http://www.fcc.gov/e-file/ecfs.html>. Generally,
    only one copy of an electronic submission must be filed. In
    completing the transmittal screen, commenters should include their
    full name, Postal Service mailing address, and the applicable docket
    or rulemaking number. Parties may also submit an electronic comment
    via e-mail. To get filing instructions for e-mail comments,
    commenters should send an e-mail to <ecfs@fcc.gov>, and should
    include the following words in the body of the message, "get form
    \<your e-mail address\>." A sample form and directions will be sent
    in reply.

32. Parties who choose to file by paper must file an original and four
    copies of each filing. All filings must be sent to the Commission's
    Secretary, Magalie Roman Salas, Office of the Secretary, Federal
    Communications Commission, 445 Twelfth Street, S.W., TW-A325,
    Washington, D.C. 20554.

33. Parties who choose to file paper should also submit their comments
    on diskette. These diskettes should be addressed to: Wanda Hardy,
    Paralegal Specialist, Mass Media Bureau, Policy and Rules Division,
    Federal Communications Commission, 445 Twelfth Street, S.W., 2-C221,
    Washington, D.C. 20554. Such a submission should be on a 3.5 inch
    diskette formatted in an IBM compatible format using Word 97 or
    compatible software. The diskette should be accompanied by a cover
    letter and should be submitted in "read only" mode. The diskette
    should be clearly labeled with the commenter's name, proceeding
    (including the lead docket number in this case (MM Docket No.
    00-108), type of pleading (comment or reply comment), date of
    submission, and the name of the electronic file on the diskette. The
    label should also include the following phrase "Disk Copy -- Not an
    Original." Each diskette should contain only one party's pleadings,
    preferably in a single electronic file. In addition, commenters must
    sent diskette copies to the Commission's copy contractor,
    International Transcription Service, Inc., 445 Twelfth Street, S.W.,
    CY-B402, Washington, D.C. 20554.

34. Comments and reply comments will be available for public inspection
    during regular business hours in the FCC Reference Center, Federal
    Communications Commission, 445 Twelfth Street, S.W., CY-A257,
    Washington, D.C. 20554. Persons with disabilities who need
    assistance in the FCC Reference Center may contact Bill Cline
    at (202) 418-0270, (202) 418-2555 TTY, or <bcline@fcc.gov>. Comments
    and reply comments also will be available electronically at the
    Commission's Disabilities Issues Task Force web site:
    [www.fcc.gov/dtf](http://www.fcc.gov/dtf). Comments and reply
    comments are available electronically in ASCII text, Word 97, and
    Adobe Acrobat.

35. This document is available in alternative formats (computer
    diskette, large print, audio cassette, and Braille). Persons who
    need documents in such formats may contact Martha Contee at (202)
    4810-0260, TTY (202) 418-2555, or <mcontee@fcc.gov>.

36. [*Ex Parte* Rules]{.underline}. This proceeding will be treated as a
    "permit-but-disclose" proceeding, subject to the
    "permit-but-disclose" requirements under section 1.1206(b) of the
    rules. 47 C.F.R. § 1.1206(b), as revised. *Ex parte* presentations
    are permissible if disclosed in accordance with Commission rules,
    except during the Sunshine Agenda period when presentations, *ex
    parte* or otherwise, are generally prohibited. Persons making oral
    *ex parte* presentations are reminded that a memorandum summarizing
    a presentation must contain a summary of the substance of the
    presentation and not merely a listing of the subjects discussed.
    More than a one or two sentence description or the views and
    arguments presented is generally required. *See* 47 C.F.R. §
    1.1206(b)(2), as revised. Additional rules pertaining to oral and
    written presentations are set forth in section 1.1206(b).

37. [Initial Regulatory Flexibility Analysis]{.underline}. With respect
    to this *Notice*, an Initial Regulatory Flexibility Analysis
    ("IRFA") is contained in Appendix B. As required by the Regulatory
    Flexibility Act, *see* 5 U.S.C. § 603, the Commission has prepared
    an IRFA of the possible economic impact on small entities of the
    proposals contained in this *Notice*. Written public comments are
    requested on the IFRA. In order to fulfill the mandate of the
    Contract with America Advancement Act of 1996 regarding the Final
    Regulatory Flexibility Analysis, we ask a number of questions in our
    IRFA regarding the prevalence of small businesses in the television
    broadcasting industry. Comments on the IRFA must be filed in
    accordance with the same filing deadlines as comments on the
    *Notice*, and must have a distinct heading designating them as a
    response to the IRFA. The Reference Information Center, Consumer
    Information Bureau, will send a copy of this *Notice*, including the
    IRFA, to the Chief Counsel for Advocacy of the Small Business
    Administration.

38. [Initial Paperwork Reduction Act Analysis]{.underline}. This
    *Notice* proposes no new information collection requirements.

39. [Additional Information]{.underline}. For additional information on
    this proceeding, please contact Roger Holberg, Policy and Rules
    Division, Mass Media Bureau, (202) 418-2130, or Dan Bring (202)
    418-2164, (202) 418-1169 TTY.

# ORDERING CLAUSES

40. Accordingly, IT IS ORDERED that, pursuant to the authority contained
    in sections 1, 2(a), 4(i), 303, 307, 309, and 310 of the
    Communications Act, as amended, 47 U.S.C. §§ 151, 152(a), 154(i),
    303, 307, 309, and 310, and Section 202(h) of the Telecommunications
    Act of 1996, this *Notice of Proposed Rulemaking* is ADOPTED.

41. IT IS FURTHER ORDERED that the Commission's Consumer Information
    Bureau, Reference Information Center, shall send a copy of this
    *Notice*, including the Initial Regulatory Flexibility Analysis, to
    the Chief Counsel for Advocacy of the Small Business Administration.

> FEDERAL COMMUNICATIONS COMMISSION
>
> Magalie Roman Salas
>
> Secretary

**APPENDIX A**

Proposed Rule Changes

Part 73 of Title 47 of the Code of Federal Regulations is proposed to be
amended to read as follows:

PART 73 -- RADIO BROADCAST SERVICES

### 1. The authority citation for Part 73 is proposed to continue reading as follows: {#the-authority-citation-for-part-73-is-proposed-to-continue-reading-as-follows .unnumbered}

Authority: 47 U.S.C. 154, 303, 334 and 336.

2.  Section 73.658(g) is proposed to be amended as follows:

    658. Affiliation agreements and network program practices;
         territorial exclusivity in non-network program arrangements.

\*\*\*\*\*

\(g\) Dual network operation. A television broadcast station may
affiliate with a person or entity that maintains two or more networks of
television broadcast stations *unless* such dual or multiple networks
are composed of two or more persons or entities that, on February 8,
1996, were "networks." For the purposes of this paragraph, the term
network means any person, entity, or corporation which offers an
interconnected program service on a regular basis for 15 or more hours
per week to at least 25 affiliated television licensees in 10 or more
states; and/or any person, entity, or corporation controlling,
controlled by, or under common control with such person, entity, or
corporation.

\*\*\*\*\*

**APPENDIX B**

**INITIAL REGULATORY FLEXIBILITY ANALYSIS**

As required by the Regulatory Flexibility Act ("RFA"),[^38] the
Commission has prepared this present Initial Regulatory Flexibility
Analysis (IRFA) of the possible significant economic impact on small
entities by the policies and rules proposed in this *Notice of Proposed
Rulemaking* (*Notice*). Written public comments are requested on this
IRFA. Comments must be identified as responses to the IRFA and must be
filed by the deadlines for comments on the *Notice* provided above in
paragraph 30. The Commission will send a copy of the *Notice*, including
this IRFA, to the Chief Counsel for Advocacy of the Small Business
Administration. *See* 5 U.S.C. § 603(a). In addition, the *Notice* and
the IRFA (or summaries thereof) will be published in the Federal
Register. *See id*.

## Need for, and Objectives of, the Proposed Rules

Section 202(h) of the Telecom Act requires the Commission to review its
broadcast ownership rules every two years, beginning in 1998, and to
"determine whether any of such rules are necessary in the public
interest as the result of competition." It instructs the Commission to
repeal or modify any regulation it determines to be no longer in the
public interest. In its first Biennial Report, issued as a result of
Section 202(h) of the Telecom Act, the Commission determined that the
dual network rule, as it currently exists, appeared to no longer be in
the public interest. Accordingly, in compliance with the provisions of
Section 202(h) of the Telecom Act, the Commission is commencing this
proceeding in order to modify Section 73.658(g) of its Rules.

## Legal Basis

This *Notice* is adopted pursuant to sections 1, 2(a), 4(i), 303, 307,
309, 310, of the Communications Act, 47 U.S.C. §§ 151, 152(a), 154(i),
303, 307, 309, 310, and Section 202(h) of the Telecommunications Act of
1996.

C. Description and Estimate of the Number of Small Entities To Which the
Proposed Rules Will Apply

The RFA directs agencies to provide a description of, and, where
feasible, an estimate of the number of small entities that may be
affected by the proposed rules, if adopted.[^39] The Regulatory
Flexibility Act defines the term "small entity as having the same
meaning as the terms "small business," "small organization," and "small
business concern" under section 3 of the Small Business Act.[^40] A
small business concern is one which: (1) is independently owned and
operated; (2) is not dominant in its field of operation; and (3)
satisfies any additional criteria established by the SBA.[^41]

Pursuant to 5 U.S.C. § 601(3), the statutory definition of a small
business applies \"unless an agency after consultation with the Office
of Advocacy of the SBA and after opportunity for public comment,
establishes one or more definitions of such term which are appropriate
to the activities of the agency and publishes such definition(s) in the
Federal Register. A "small organization" is generally "any
not-for-profit enterprise which is independently owned and operated and
is not dominant in its field."[^42] Nationwide, as of 1992, there were
approximately 275,801 small organizations.[^43] "Small governmental
jurisdiction" generally means "governments of cities, counties, towns,
townships, villages, school districts, or special districts with a
population of less than 50,000."[^44] As of 1992, there were
approximately 85,006 such jurisdictions in the United States.[^45] This
number includes 38,978 counties, cities, and towns; of these, 37,566, or
96 percent, have populations of fewer than 50,000.[^46] Thus, of the
85,006 governmental entities, we estimate that 81,600 (91 percent) are
small entities.

[Small TV Broadcast Stations]{.underline}. The SBA defines small
television broadcasting stations as television broadcasting stations
with \$10.5 million or less in annual receipts.[^47] According to
Commission staff review of the BIA Publications, Inc., Master Access
Television Analyzer Database, fewer than 800 commercial TV broadcast
stations (65%) subject to our proposal have revenues of less than \$10.5
million dollars. We note, however, that under SBA's definition, revenues
of affiliates that are not television stations should be aggregated with
the television station revenues in determining whether a concern is
small. Therefore, our estimate may overstate the number of small
entities since the revenue figure on which it is based does not include
or aggregate revenues from non-television affiliated companies. It would
appear that there would be no more than 800 entities affected.

## D. Description of Projected Reporting, Recordkeeping, and Other Compliance Requirements {#d.-description-of-projected-reporting-recordkeeping-and-other-compliance-requirements .unnumbered}

Currently, Section 73.3613 of the Commission's rules requires TV
broadcast licensees to file network affiliation contracts. The *Notice*
proposes no change to that requirement or any new recordkeeping or other
compliance requirements.

E.  Steps Taken to Minimize Significant Impact on Small Entities, and
    Significant Alternatives Considered

The RFA requires an agency to describe any significant alternatives that
it has considered in reaching its proposed approach, which may include
the following four alternatives: (1) the establishment of differing
compliance or reporting requirements or timetables that take into
account the resources available to small entities; (2) the
clarification, consolidation, or simplification of compliance or
reporting requirements under the rule for small entities; (3) the use of
performance, rather than design, standards; and (4) an exemption from
coverage of the rule, or any part thereof, for small entities.

As indicated above, the *Notice* proposes to allow licensees to
affiliate with a network entity that maintains two or more networks
unless such multiple networks consist of more than one of the "big four"
networks (NBC, ABC, CBS and Fox). This would eliminate the bar on
affiliation with an entity that maintains one of the "big four" networks
and the UPN and/or WB networks. All significant alternatives, *i.e.*,
retention of the existing rule, modification of the existing rule, and
elimination of the dual network rule altogether, were recently
considered in the Commission's 1998 biennial review of its broadcast
ownership rules (MM Docket No. 98-35). In that proceeding the Commission
tentatively determined that elimination of the subject provision would
be in the public interest. The Commission considered the results of this
top-to-bottom review of the subject rule in its consideration of
alternatives to the course proposed herein in the instant proceeding.
The proposed action will provide television licensees, including those
considered to be "small businesses," to have increased flexibility with
regard to the broadcast networks with which they may affiliate.

## Federal Rules that May Duplicate, Overlap, or Conflict With the Proposed Rules

None.

Separate Statement of Commissioner Harold W. Furchtgott-Roth

In the Matter of Amendment of Section 73.658(g) of the Commission's
Rules -- the Dual Network Rule, Notice of Proposed Rulemaking

I support the decision to cut back on the reach of the dual network
rule. I would have gone further, however, and asked whether the rule
remains necessary at all. I believe that the record evidence in the
Biennial Review supported not just modification but repeal of the rule.
I therefore can only concur in this rulemaking.

CONCURRING STATEMENT OF

COMMISSIONER MICHAEL K. POWELL

*Re: Amendment of Section 73.658(g) of the Commission's Rules -- The
Dual Network Rule.*

I concur in the Commission's decision to initiate the instant NPRM to
consider modification of the Dual Network Rule as it applies to UPN and
the WB. While I would support an NPRM that would also consider repeal of
the current rule as it applies to the top four networks, I believe that
the record supports this more limited NPRM as an adequate first step. I
look forward, however, to continuing to review this rule in our upcoming
biennial reviews.

The NPRM seeks comment on whether there are merger conditions that we
could impose aimed at maintaining separation between the programming
decisions of the two networks while still realizing the efficiencies of
the merger. I will state at the outset my skepticism that such
conditions are necessary in light of marketplace conditions, that they
can be sufficiently narrowly tailored to overcome First Amendment
concerns, or that they can be meaningfully enforced. In addition, I am
doubtful that generalized conditions created in the context of a
rulemaking can address specific concerns raised in the course of a
particular merger. I encourage commenters to fully explore these issues.

[DISSENTING STATEMENT OF COMMISSIONER GLORIA TRISTANI]{.underline}

*In the Matter of Amendment of Section 73.658(g) of the Commission's
Rules---The Dual Network Rule---MM Docket No. 00-108*

For the reasons noted in my partial dissent accompanying the *1998
Biennial Regulatory Review* (copy attached), I dissent from the
majority's tentative conclusion that the dual network rule should be
modified to permit ABC, CBS, Fox, or NBC to combine with UPN or WB. I
therefore do not support the issuance of this *NPRM.*

[STATEMENT OF COMMISSIONER GLORIA TRISTANI,]{.underline}

[DISSENTING IN PART]{.underline}

*In the Matter of 1998 Biennial Regulatory Review---Review of the
Commission's Broadcast Ownership Rules and Other Rules Adopted Pursuant
to Section 202 of the Telecommunications Act of 1996---MM Docket No.
98-35*

I dissent from the majority's conclusion that the dual network rule
should be modified to permit ABC, CBS, Fox, or NBC to combine with UPN
or WB. Such a modification is unsupported by the record and, if
ultimately adopted, would further erode the already tenuous level of
diversity available on the public airwaves.

Congress itself modified the dual network rule only four years ago, as
part of the Telecommunications Act of 1996. In describing the networks
covered by its amended rule, Congress expressly referred to "emerging
networks (WBTN, UPN)," a fact recently relied on by the Commission in
applying the rule to UPN in connection with the CBS-Viacom merger.[^48]
Thus, in 1996, Congress found that the state of competition warranted
continued application of the dual network rule to UPN and WB.
Admittedly, the Commission may change the rule adopted by Congress
pursuant to the biennial review provisions of the 1996 Act. But nothing
has occurred in the past four years that should lead us to question
Congress' judgment.

To the contrary, all of the arguments advanced by the majority as
justifying modification of the rule were as true, if not more true, in
1996 than they are today. First, the majority asserts that program
production and networking are complementary inputs that make vertical
integration desirable, and that a merger of one of the top four networks
with UPN or WB could be characterized as a merger of an established
broadcast network with an established program producer. Leaving aside
the factual inaccuracies of this argument (e.g., ABC and Fox are
affiliated with major production studios just like UPN and WB), this
characterization was equally true in 1996. Second, the majority argues
that the rule should be retained for the top four networks but repealed
for UPN and WB because the former are "established" broadcast networks,
while the latter are still "nascent." Again, however, even assuming that
UPN and WB are still "nascent" networks, they were far more nascent in
1996, when Congress specifically decided that they should fall within
the dual network rule's application.

It is not hard to anticipate the effect that modification of the rule
will have. It will reduce diversity on the public airwaves by reducing
the number of outlets available to independent program producers.
Independent programmers are already having a difficult time gaining
network carriage. For the new television season, a record 24 of 37 new
series are either owned or co-owned by the television networks which
will air them.[^49] Disney will own or co-own an interest in 3 out of 4
of ABC's new programs; CBS owns an interest in 6 of 7 new shows; NBC
owns an interest in 4 of 7 new shows; 20^th^ Century Fox will own or
co-own 5 of Fox's 9 new shows; Paramount will produce 2 of UPN's 4 new
series; Warner Brothers will own or co-own 4 of 6 new shows for WB.[^50]
Far from demonstrating that the rule has outlived its usefulness, the
marketplace shows that the rule may be needed more today than ever.

The Order emphasizes the economic efficiencies that would accrue to
incumbent networks by modifying the rule. This I do not doubt. But we
have a higher duty than helping broadcasters maximize their private
gain. Our first duty is to manage the airwaves in a manner that promotes
the public's interest in competition and diversity. In the absence of
evidence that more than four independent networks are not economically
feasible, we should be cautious about changing our priorities.

[^1]: These networks are not explicitly named in the rule. However, the
    statute and legislative history of the Telecommunications Act of
    1996, which required the Commission to amend the dual-network to its
    current form make it clear that these are the networks intended to
    be described by the legislation. For a more detailed explanation see
    "Background," [infra]{.underline}.

[^2]: [Biennial Review Report]{.underline} in MM Docket No. 98-35
    ("Biennial Report"), FCC 00-191 (Adopted May 26, 2000).

[^3]: 6 FR at 2282 (Tuesday, May 6, 1941).

[^4]: [Id]{.underline}. The dual network rule did not apply if the
    networks were not operated simultaneously or if there was no
    substantial overlap in the territories served by each network. The
    rule was directed at NBC, the only company then with two radio
    networks. The Commission found that operation of the \"Red\" and
    \"Blue\" networks gave NBC excessive control over its affiliates
    because their contracts did not specify whether a station was part
    of the \"Red\" or \"Blue\" Network. Further, the Commission
    concluded that operation of two networks gave NBC an unfair
    competitive advantage over other networks and protected it against
    future competition. Commission Order No. 37, [Report on Chain
    Broadcasting]{.underline} at 70-73. The Commission indefinitely
    suspended the rule in 1941 noting that voluntary separation of the
    Red and Blue networks would soon occur. FCC, Supplemental Report on
    Chain Broadcasting 14 (1941). After NBC sold its Blue network in
    1943, the prohibition was readopted. 8 Fed. Reg. 16,005 (1943).

[^5]: [Amendment of Part 3 of the Commission\'s Rules]{.underline}, 11
    FR 33 (Jan. 1, 1946).

[^6]: [Notice of Proposed Rule Making]{.underline}, 10 FCC Rcd 11951,
    11967 (1995).

[^7]: [Order]{.underline}, 11 FCC Rcd 12374 (1996).

[^8]: Pub. L. No. 104-104, 110 Stat. 56 (1996).

[^9]: S. Rep. No. 230, 104^th^ Cong., 2d Sess. At 163.

[^10]: See, in particular, Oliver E. Williamson, *The Economic
    Institutions of Capitalism* (New York: The Free Press, 1985) and
    Oliver E. Williamson, *The Mechanisms of Governance* (New York:
    Oxford University Press, 1996). A survey of recent neo-institutional
    economics, inclusive of TCE, is provided by Eirik G. Furubotn and
    Rudolf Richter, *Institutions and Economic Theory: The Contribution
    of the New Institutional Economics*, (Ann Arbor, Michigan:
    University of Michigan Press, 1997).

[^11]: The merger of two *vertically-integrated* enterprises may have
    both horizontal and vertical economic effects. Horizontal effects
    refer to the economies or diseconomies resulting from enlarging the
    *size* of the firm post-merger and include effects on consumers,
    such as higher or lower prices and changes in the quantity and
    quality of output produced. These effects can be assessed at *each
    stage* of production of the vertically-integrated firm. For a
    television network vertically-integrated into the production of
    network programming, the assessment of horizontal effects would
    include assessing the economies or diseconomies of increasing the
    size of the network *and* the economies or diseconomies of
    increasing the size and scale of program production, assuming that
    the network that is being acquired is also vertically-integrated
    into program production. The effects of the merger of two program
    production enterprises on competition in the network television
    program production market would also be included in the analysis of
    horizontal effects. Growth in the size of the vertically-integrated
    firm post-merger may either accentuate the economies of vertical
    integration post-merger or diminish the efficiencies of vertical
    integration as organizational complexity increases and coordination
    of decisionmaking within the larger firm becomes more difficult and
    costly. Vertical effects refer to the economies or diseconomies of
    integrated production as the size of the vertically-integrated firm
    increases. The analytical framework suggests a way to assess the
    relative significance of some of these horizontal and vertical
    effects that may result from the merger of two television networks
    that are both vertically integrated into the production of network
    television programming.

[^12]: Standard economic analyses of the effects of a horizontal merger
    of two competing firms, such as two television networks, do not
    ordinarily include an assessment of the effects of the proposed
    merger on the efficiency of vertical integration within the
    acquiring firm, especially if the acquired firm is not vertically
    integrated. However, vertical relationships within the network
    television broadcasting business are endemic in the industry and
    virtually define its economic purpose and industry structure,
    especially the vertical relationship between a television network
    and its affiliated local broadcast stations. Increasingly,
    television networks, like cable television multiple system
    operators, are vertically integrated into the production of
    programming. Thus, television networks today are intrinsically
    vertically-integrated enterprises and to ignore the impact of a
    horizontal merger on the efficiency of such integration is to ignore
    a critical dimension of the economic effects produced by the merger.
    Consequently, this unconventional approach seems appropriate to
    evaluate more completely the economic implications of a potential
    merger between two television networks.

[^13]: See Bruce M. Owen and Steven S. Wildman, *Video Economics*
    (Cambridge, Mass.: Harvard University Press, 1992), p. 3.

[^14]: Of the 27 prime time programs viewed in more than ten million
    households during the week of January 17-23, 2000, all 27 were aired
    by either ABC, CBS, NBC or Fox. The largest share for a UPN program
    was approximately 5 million homes and the most popular cable program
    (during any hour) was viewed in just under 5 million homes. Source:
    Nielsen Media Research.

[^15]: For further discussion of pure public goods, see Gareth D. Myles,
    *Public Economics* (Cambridge, U.K.: Cambridge University Press,
    1995), Chapter 9.

[^16]: It is possible, of course, that new audiences for the program
    cannot be found or existing audiences tire of the program and will
    no longer watch it. The program becomes *obsolete* as an
    audience-producing asset, although the program itself is not
    physically depleted by repeated airings on television.

[^17]: A timetable for the expiration of the financial interest and
    syndication rules was adopted by the Commission in 1993.
    [See]{.underline} [Second Report and Order in MM Docket No.
    90-162]{.underline}, 8 FCC Rcd 3282 (1993), [recon. granted in
    part]{.underline}, [Memorandum Opinion and Order in MM Docket No.
    90-162]{.underline}, 8 FCC Rcd 8270 (1993), [aff'd sub nom. Capital
    Cities/ABC, Inc. v. FCC]{.underline}, 29 F.3d 309 (7^th^ Cir. 1994).

[^18]: Williamson, *The Economic Institutions of Capitalism*, p. 45
    (quoting Herbert Simon; italics in the original.)

[^19]: [Ibid]{.underline}., p. 47. With respect to other aspects of
    contract negotiations, the network may also behave
    opportunistically, especially if such behavior is *expected* of the
    program producer.

[^20]: The formal economics of risk sharing between program producers
    and television networks are discussed in Owen and Wildman, *Video
    Economics*, pp. 180-196.

[^21]: [See]{.underline} Williamson, *Economic Institutions of
    Capitalism*, Chapter 2. Williamson defines a governance structure as
    "The institutional matrix in which the integrity of a transaction is
    decided. In the commercial sector, three discrete structural
    governance alternatives are commonly recognized: classical market,
    hybrid contracting, and hierarchy." See Williamson, *The Mechanisms
    of Governance*, p. 378.

[^22]: Williamson, *Economic Institutions of Capitalism*, p. 78.

[^23]: Once fully or partially vertically-integrated into program
    production, the network has full or enlarged claim on revenue
    opportunities in all distribution windows which may enhance the
    network's incentive to invest in innovative programming.

[^24]: Often, a network affiliate shares the fixed costs of network
    programming by giving the network broadcast time which the network
    then sells to network advertisers. In some cases, network affiliates
    make cash payments to networks in addition to broadcast time.

[^25]: A strategic group refers to a cluster of independent firms
    *within* an industry that pursue similar business strategies. For
    example, the major networks supply programming to their affiliated
    local stations that is intended to attract mass audiences and
    advertisers that want to reach such large, nationwide audiences. By
    contrast, the emerging networks target more specialized, niche
    audiences similar to cable television networks. The conceptual basis
    for a strategic group is developed in R. E. Caves and M. E. Porter,
    "From Entry Barriers to Mobility Barriers: Conjectural Decisions and
    Contrived Deterrence to New Competition," *Quarterly Journal of
    Economics* 91 (May 1977): 241-261. Also see Michael E. Porter,
    *Competitive Strategy: Techniques for Analyzing Industries and
    Competition* (New York: The Free Press, 1980), Chapter 7. For
    additional references on the application of the strategic group
    concept, see F. M. Scherer and David Ross, *Industrial Market
    Structure and Economic Performance, 3^rd^ Edition*, (Boston:
    Houghton Mifflin, 1990), pp. 284-85. When properly applied, the
    concept of a strategic group ordinarily implies that only a
    relatively few firms will be included within its boundaries so that
    competitive rivalry will be oligopolistic in nature, although the
    number of firms actually populating the industry aggregated over all
    strategic groups may be quite numerous.

[^26]: The Veronis, Suhler & Associates Communications Industry Forecast
    (13^th^ Edition, November 1999) states "Ironically, the forces of
    supply and demand work in favor of the broadcast networks. With the
    ability to reach a large audience becoming scarcer for all media,
    those outlets that can still deliver a mass audience have become
    more valuable. In the upfront market for the 1999-2000 season, the
    broadcast networks scored double digit gains, reflecting the fact
    that their inventory has a reach that is well in excess of any
    single cable outlet." (page 142)

[^27]: Mobility barriers are barriers to entry that deter the movement
    of a firm *within* a given industry from shifting from one strategic
    group to another. Differed strategic groups will be defended by
    different mobility barriers that vary in the effectiveness in
    restricting entry into a given strategic group. In general, firms
    protected by high mobility barriers will have greater profit
    potential than firms in other strategic groups protected by low
    mobility barriers.

[^28]: Pricing and output behavior by the major networks may be
    conceptualized as *Cournot competition in quantities*. (On Cournot
    models in general as applied in empirical studies, see John Sutton,
    *Sunk Costs and Market Structure* (Cambridge, Mass.: MIT Press,
    1991)). In other words, the networks by contractual arrangement with
    their affiliated stations produce *capacity output* at all times,
    representing the profit-maximizing quantity of programming that
    affiliated stations are expected to "clear" over all dayparts. As a
    result, each network in the strategic group is expected to maximize
    profit assuming that the quantity of output produced by its rival
    networks is not affected by its own output decisions. More
    specifically, it can be shown within the formal context of a simple
    Cournot in quantities model that the profits of a network will
    depend on the ratio S/N^2^, where S measures market size, and N
    measures the number of television networks in the major network
    strategic group. ([Ibid]{.underline}.) Holding market size constant,
    the profits of the network vary inversely will the square of the
    number of networks. Equilibrium price for network advertising for
    any given network in the strategic group will reflect p = c\[1 +
    1/(N - 1)\], where p measures the unit price of network advertising,
    and c measures the marginal cost of producing an additional unit of
    network advertising. The term 1/(N - 1) represents a "markup" over
    the marginal cost of production that, like profits, varies inversely
    with the number of network competitors. Thus, as the number of
    networks *decrease*, the effective markup over marginal cost
    *increases*. Conversely, as the number of network competitors
    *increase,* the effective markup over marginal cost *decreases*,
    approaching zero as the number of competing networks becomes large.
    [See]{.underline} [ibid]{.underline}., Chapter 2.

[^29]: The merger may, of course, result in some scale economies as the
    post-merger network increases in size. The extent of such possible
    economies, if any, is not known.

[^30]: The modern economics literature on program choice carefully
    examines the special circumstances where *fewer* networks *may*
    broaden the variety of network programming. For a survey, see Bruce
    M. Owen and Steven S. Wildman, *Video Economics* (Cambridge, Mass.:
    Harvard University Press, 1992), Chapters 3 and 4.

[^31]: An analysis by Commission staff suggests that economic
    concentration within the major network strategic group as measured
    by the Herfindahl-Hirschman Index (HHI) presently exceeds 2600,
    indicating a "highly concentrated" market. Any merger between or
    among the four major networks would exceed 100 points, suggesting
    that such a merger would enhance market power or facilitate its
    exercise. See U.S. Department of Justice and the Federal Trade
    Commission, *Horizontal Merger Guidelines* (Issued April 2, 1992;
    revised April 8, 1997).

[^32]: From an economic perspective, the emerging networks strategic
    group would include WB, UPN, Pax Net, Univision, Telemundo, and
    possibly some national syndicators. From a legal perspective, the
    1996 Act restricted the membership of the emerging networks
    strategic group to include only WB and UPN.

[^33]: A Commission staff analysis suggests, for example, that the
    merger of WB with CBS would increase the relevant HHI by less than
    100 points, suggesting potentially significant competitive concerns
    but not the presumption of enhanced market power. See *Horizontal
    Merger Guidelines*, Section 1.51(c).

[^34]: A historical perspective on the problem of network dominance and
    the Commission's policy responses to it are provided in the Final
    Report of the Network Inquiry Special staff to the Federal
    Communications Commission. See Network Inquiry Special staff, *New
    Television Networks: Entry, Jurisdiction, Ownership and Regulation*.
    (FCC, 1980). At the time of this report, there were only three
    television networks, namely ABC, NBC, and CBS, compared to today.
    Among the television networks founded since the Network Inquiry
    Report are Fox, UPN, WB, Pax Net, and Telemundo.

[^35]: See "FCC Commences Periodic Review of Digital Television
    Conversion," press release announcing the release of a Notice of
    Proposed Rulemaking in MM Docket No. 00-39 (FCC 00-83), March 6,
    2000.

[^36]: In other words, rivalry between and among direct competitors
    (*i.e.*, the major networks), which still remain relatively few in
    number even after twenty years, has been augmented by the growth of
    partial substitutes, such as cable television and direct broadcast
    television, supplied by firms outside the major networks strategic
    group. This growth in partial substitutes dilutes to some degree the
    market power of major networks relative to their market power in the
    absence of such substitutes.

[^37]: Both competition and diversity have been the twin goals of the
    Commission's broadcasting policy for many years. See [Report and
    Order]{.underline} in MM Docket Nos. 91-221 & 87-8, 14 FCC Rcd 12903
    at 12910-11 (1999). ("[TV Ownership Order"]{.underline} ) Both
    "outlet" and "source" diversity provide the means for promoting
    "viewpoint" diversity. *TV Ownership Further Notice*, 10 FCC Rcd. at
    3549-3550. "Outlet" diversity refers to "a variety of delivery
    services (e.g., broadcast stations) that select and present
    programming directly to the public"; "source" diversity refers to "a
    variety of program producers and owners." *Id*. At 3549-3550. Both
    outlet and source diversity are "integral to the ultimate goal of
    providing the public with a variety of viewpoints. . . . The
    Commission has felt that without a diversity of outlets, there would
    be no real viewpoint diversity -- if all programming passed through
    the same filter, the material and views presented to the public
    would not be diverse. Similarly, the Commission has felt that
    without diversity of sources, the variety of views would necessarily
    be circumscribed." *Id*. At 3550-3551.

[^38]: S*ee* 5 U.S.C. § 603. The RFA, *see* 5 U.S.C. § 601 *et seq.*,
    has been amended by the Contract With America Advancement Act of
    1996, Pub. L. No. 104-121, 110 Stat. 847 (1996) (CWAAA). Title II of
    the CWAAA is the Small Business Regulatory Enforcement Fairness Act
    of 1996 (SBREFA).

[^39]: 5 U.S.C. § 603(b)(3).

[^40]: *Id.* § 601(3).

[^41]: *Id*. § 632.

[^42]: 5 U.S.C. § 601(4).

[^43]: 1992 Economic Census, U.S. Bureau of the Census, Table 6 (special
    tabulation of data under contract to Office of Advocacy of the U.S.
    Small Business Administration).

[^44]: 5 U.S.C. § 601(5).

[^45]: U.S. Dept. of Commerce, Bureau of the Census, "1992 Census of
    Governments."

[^46]: [Id]{.underline}.

[^47]: 13 C.F.R. § 121.201 (SIC Code 4833)

[^48]: *See* Mem. Op. and Order, FCC 00-155 (rel. May 3, 2000) at para.
    10, *citing* 142 Cong. Rec. H1078-03, \*H1121.

[^49]: Joe Schlosser and Steve McClellan, "*Moneyphilia*," Broadcasting
    and Cable, May 22, 2000 at 17.

[^50]: *Id.*