The FCC’s Financial Qualification Requirements: Economic Evaluation of a Barrier to Entry for Minority Broadcasters

I. INTRODUCTION In 1965, the Federal Communications Commission ("Commission" or "FCC") articulated certain financial requirements that applicants for broadcast licenses must satisfy. Specifically, applicants had to show they had sufficient funds to cover application costs, construction costs, and the operating expenses for one year without any revenue offsets.(1) This standard, known after the 1965 case as the Ultravision standard, was viewed as implementing the general requirements that "all applications ... shall set forth such facts as the Commission by regulation may prescribe as to the ... financial ... qualifications of the applicant."(2) The Commission reduced the operating expense part of the financial qualification to the first three months of operation in a series of decisions in 1978, 1979, and 1981.(3) In announcing these actions, the Commission explicitly cited its concern about the level of minority ownership of broadcasters: In announcing this policy change, the Commission considers its action to be one which will provide a more reasonable and realistic financial qualification standard for all aural applicants and will specifically benefit minority applicants seeking entry into the radio broadcast service. The Commission's decision here is based, in large part, on the finding, in its Minority Ownership Task Force Report, that station financing has been a principal barrier to minority broadcast ownership.(4) Additionally, the Ultravision standard conflicts with Commission policies favoring minority ownership and diversity because its stringency may inhibit potential applicants from seeking broadcast licenses.(5) As stated, the underlying rationale is that the financial qualification standard poses a barrier to the entry of new firms into the broadcast market, and this barrier affects, on a disproportionate basis, minority-owned firms which are generally smaller and less well financed than non-minority firms.(6) While the specific policies and regulations discussed here date back to the 1980s, the issue of minority ownership remains timely for three reasons: (1) the renewed interest of the Commission in increasing minority ownership of broadcasters,(7) (2) the changes in ownership limits enacted in the Telecommunications Act of 1996,(8) and (3) the planned use of auctions to award new television broadcast licenses,(9) possibly raising new barriers to the entry of minorities. This Article focuses on how one might collect and analyze evidence to measure the economic effects of the financial qualification requirements. This Article shall ignore the questions whether these requirements are politically desirable or constitutional, and instead it will focus on economic, not legal, analysis, and examine three major research questions: (1) Did the FCC's financial qualification regulations in the 1980s create an unreasonable disadvantage to minorities in the award of new broadcast licenses? (2) Can one measure the economic effects on minority broadcasters, on minority employment, and on program suppliers? (3) Can one detect any effect on programming and editorial content of these financial requirements? The questions this Article addresses are both important and complex. Rarely does one event or policy occur in isolation, so generally one cannot rely on straightforward scientific experiments or quasi-experiments to answer the specific research questions that arise. For example, no one expects the Commission to impose one set of rules on half of the country, while refraining from doing so for the other half, just to facilitate the measurement of the consequences of those rules. Instead, this Article demonstrates a research model and design that, hopefully, enables the detection and measurement of the effects of a specific policy or scenario, as unambiguously as possible and with little confounding. …