Media Ownership: FCC Should Review the Effects of Broadcaster Agreements on Its Media Policy Goals
Published: 2014-06-27T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Local television stations play an important role in educating, entertaining, and informing the citizens they serve. FCC limits the number of television stations an entity can own or control to advance its media policy goals of competition, localism, and diversity. Competing television stations are entering into agreements to share or outsource services, and some policymakers are concerned about the effects of these agreements on competition and programming.
GAO was asked to review issues related to broadcaster agreements. This report examines (1) the uses and prevalence of broadcaster agreements; (2) stakeholders' views on the effects of broadcaster agreements; and (3) the extent, if at all, that FCC has regulated these agreements.
To address these objectives, GAO reviewed relevant FCC proceedings; conducted a literature review; interviewed officials from FCC, industry, and consumer associations; and conducted nongeneralizable case studies in 6 markets (3 with agreements and 3 without) selected from small and medium-sized markets.
section_title: What GAO Found
paragraphs: Local television stations use broadcaster agreements to share services with one another, but data are limited on the prevalence of these agreements. Stations use agreements to share or outsource a range of services, such as selling advertising time and producing local news. Agreements are referred to by a variety of names and two—joint sales agreements and local marketing agreements—have regulatory definitions; other types of agreements have commonly been referred to as shared service agreements or local news service agreements. Stations may participate in more than one type of agreement. Federal Communications Commission (FCC) officials and industry representatives could not identify a central data source that tracks all broadcaster agreements. Station owners and financial analysts said that agreements are more prevalent in small markets because they have lower advertising revenues than large markets. Further, FCC officials and stakeholders said that agreements are becoming more prevalent, and stakeholders stated that economic factors, including declining advertising revenues, drive the use of agreements.
Stakeholders expressed mixed views on the effects of broadcaster agreements. Consumer groups raised concerns that agreements in which stations share news resources can lead to duplicative content in local newscasts. Station owners counter that the agreements are needed to allow some stations to continue providing news and allow other stations that previously did not provide news to begin doing so. In addition, some agreements include provisions that allow stations to jointly negotiate for their signals to be carried by cable and satellite providers. Cable and satellite providers argue that these agreements increase stations' negotiating leverage and thereby contribute to higher prices for cable and satellite service. In contrast, station owners counter that these concerns are overstated. Comprehensive data are not available to evaluate this issue, because the negotiations are subject to nondisclosure agreements, and there is no data source identifying which stations participate in agreements.
FCC evaluates broadcaster agreements that occur in the context of a merger or acquisition, but it has not collected data or completed a review to understand the use and effects of broadcaster agreements. FCC's recent regulatory approach has been to evaluate broadcaster agreements that occur as part of a merger or acquisition and to propose specific remedies as needed. To promote its media policy goals of competition, localism, and diversity, FCC established media ownership rules that limit the number of stations an entity can own or control in a local market. Station owners and consumer groups said that broadcaster agreements are used in situations where common ownership of stations is prohibited by FCC's media ownership rules. FCC has stated that it is unable to determine the extent to which broadcaster agreements affect its policy goals and media ownership rules. Specifically, FCC does not collect data and has not completed a review on the prevalence of agreements, how they are used, or their effects on its policy goals and media ownership rules. Yet federal standards for internal control note the importance of agencies' having information that may affect their goals. Without data and a fact-based analysis of how agreements are used, FCC cannot ensure that its current and future policies on broadcaster agreements serve the public interest.
section_title: What GAO Recommends
paragraphs: FCC should determine whether it needs to collect additional data to understand the prevalence and context of broadcast agreements and whether broadcaster agreements affect its media policy goals of competition, localism, and diversity. FCC agreed with the recommendation and noted that it has taken initial steps to address the recommendation, including proposing disclosure of sharing agreements.

section_title: Letter
paragraphs: Local television stations play an important role in educating, entertaining,  and informing the citizens they serve. Congress and the Federal  Communications Commission (FCC) have recognized the importance of  this role by allowing local television stations to use the public airwaves to  broadcast their signals, and by giving stations specific rights with respect  to carriage of their broadcast signals on cable, satellite, and other  subscription video services. In return, Congress and FCC have  established certain obligations for local television stations, such as  requiring that stations operate in the public interest. The laws and  regulations outlining how local television stations should serve the public  interest have evolved over time and become less prescriptive. However,  three long-standing policy goals have guided FCC’s regulation of stations:  competition, localism, and diversity. To advance these policy goals,  Congress empowered FCC, and FCC has implemented broadcast  ownership rules that limit the number of stations an entity can own or  control locally and nationally. Since these rules were established, the  media landscape has evolved, resulting in the proliferation of cable  networks and Internet outlets, to provide citizens a broader array of  content than was once the case. This increase in media competition has  presented economic challenges for local television stations. In some  cases, stations have entered into broadcaster agreements that allow  them to share resources with other stations or contract out certain  services. However, some policymakers and public interest groups have  expressed concerns that such agreements allow competing stations to  collaborate, avoid FCC’s media ownership limits, and could negatively  affect FCC’s policy goals of competition, localism, and diversity.
You asked us to review issues related to the use of broadcaster  agreements. This report reviews (1) what is known about the uses and  prevalence of broadcaster agreements; (2) stakeholders’ views on the  effects of broadcaster agreements on programming and the subscription  video industry; and (3) the extent, if at all, that FCC has regulated these  agreements.
To address these objectives, we conducted a literature review that  included relevant FCC regulations and rulemakings, prior GAO reports,  academic studies, industry and advocacy reports, and media articles. We  verified information from the literature review through interviews with FCC  and Department of Justice (DOJ) officials. We also interviewed a variety  of stakeholders that included: representatives of broadcast networks;  local television station owners; cable, satellite, and other subscription  video service providers; trade associations; labor groups; consumer  groups; financial analysts; and other individuals with knowledge of the  broadcast industry. We selected local television station owners and  subscription video service providers that filed comments in FCC’s 2010  media ownership proceeding and that varied in the number of stations  they owned or the number of subscribers they served, respectively; we  selected other stakeholders by reviewing prior GAO reports, academic  studies, and comments filed in FCC media-ownership and related  proceedings, and through recommendations from other interviewees.
To assess how broadcaster agreements are used in the television  industry, we conducted nongeneralizable case studies of six markets  (three in which local stations used broadcaster agreements and three in  which they did not) to understand how agreements were used in specific  markets and obtain the perspective of the various station owners in those  markets; we selected the case study markets from small and medium- sized markets. To assess what is known about the prevalence of  broadcaster agreements, we interviewed stakeholders about the  comprehensiveness of data collected by FCC, private-sector, public- interest, and academic sources on the number of broadcaster  agreements nationwide. In addition, we acquired data from BIA/Kelsey, a  market-research firm, to assess the prevalence of certain types of  agreements, the stations involved in the agreements, and the size of the  markets served by the stations. We tested the reliability of BIA’s data by  reviewing stakeholder opinions on the reliability and accuracy of the data,  reviewing existing information about the data, and obtaining information  from BIA officials about how they collect the data; we found the data  sufficiently reliable for our purposes.
To determine stakeholders’ views on the effects of broadcaster  agreements on programming and the subscription video industry, we  reviewed FCC dockets and interviewed representatives of broadcast  networks; local television station owners; cable, satellite, and other  subscription video service providers; trade associations; labor groups;  consumer groups; financial analysts; and other individuals with  knowledge of the broadcast industry to collect their arguments and any  supporting studies and data on the effects of broadcaster agreements. To  determine the extent to which FCC has regulated broadcaster  agreements, we reviewed relevant FCC dockets and rulings and  interviewed FCC officials. See appendix I for more information about our  scope and methodology.
We conducted this performance audit from July 2013 to June 2014 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
subsections: section_title: Background
subsections: section_title: Television Broadcast Industry
paragraphs: Typically, households receive television programming through over-the- air broadcasts or a subscription video service. Broadcast television  provides free over-the-air programming to the public through local  television stations; according to FCC, almost 10 percent of households  exclusively rely on over-the-air television. In contrast, consumers pay fees  to video providers, including cable operators, satellite providers, or  telecommunications companies—collectively referred to as multichannel  video programming distributors (MVPD)—for subscription video service  that includes local television stations as well as cable networks, such as  CNN and ESPN. Television broadcast stations are licensed by FCC and  are permitted to transmit a video broadcast signal on a specific radio  frequency in a particular area and at a particular strength.
Television stations produce, acquire, and distribute programming. Some  stations are owned by or affiliated with one of the four major broadcast  networks (ABC, CBS, FOX, and NBC). If a local station is owned and  operated by a network, it is referred to as an “owned and operated”  station; if it is independently owned but affiliated with the network, it is  referred to as an affiliate station. Owned and operated and affiliated  stations carry network programming and network-inserted advertisements  during specific time periods. For example, a station that is affiliated with  FOX has an agreement with the network that allows it to show FOX  programs at particular times of the day. Aside from the network-furnished  programming, including prime time shows, afternoon soap operas,  national news programs, and sports, local stations fill in the rest of the  week’s programming time with local programming (such as local news)  and syndicated programming. In addition, there are independent stations  that are neither owned by nor affiliated with a broadcast network. Figure 1  illustrates how television programming is distributed, including broadcast  and cable network programming.
Local commercial television stations earn the majority of their revenue by  selling advertising time. In particular, advertising aired during local news  represents a substantial portion of a local commercial station’s revenue.  According to the 2013 Radio Television Digital News Association  (RTDNA)/Hofstra University survey of 1,377 television stations, news  represented an average of about 49 percent of station revenue, with that  percentage increasing as market size decreased.4 The survey also found  that of the stations surveyed, a total of 717 stations provided their own  local news programming, and 235 stations received and aired news  produced by another station. Many stations also receive compensation  from MVPDs, known as retransmission consent, which is discussed later  in this section.
2013 RTDNA/Hofstra University Survey. RTDNA is a professional organization serving  the electronic news profession. RTDNA members include local and network news  executives, news directors, producers, reporters, digital news professionals, educators,  and students. The RTDNA/Hofstra University Survey is an annual survey of operating  television stations. percent of Americans said they used a desktop or laptop computer to  access news, whereas 54 percent said they accessed it on a mobile  device (cell phone or tablet).
section_title: Regulatory Environment
paragraphs: FCC assigns licenses for television stations to use the airwaves expressly  on the condition that licensees serve the public interest and are  responsive to the needs of the local community. Section 310 of the  Communications Act of 1934 outlines the limitations on holding and  transferring broadcast licenses. For example, section 310(d) requires  prior Commission approval before a license is assigned or transferred;  when FCC is reviewing an application for a license assignment or  transfer, it must determine whether the public interest, convenience, and  necessity will be served by granting the application.9 Toward this end,  FCC has established three policy goals:
Competition. FCC seeks to create a marketplace in which broadcast  programming meets the needs of consumers and has stated that  competition drives stations to invest in better local programming.  When reviewing competition in local television markets, FCC  considers competition for viewers and advertisers.
Localism. FCC seeks to ensure that each station meets the needs  and issues of the community that it is licensed to serve with the  programming that it offers.
Diversity. FCC seeks to maintain and enhance diversity based on the  idea that diverse ownership among media outlets increases the  number of viewpoints in broadcast content compared to what would  otherwise be the case in a more concentrated ownership structure.
47 U.S.C. §310(d).
47 C.F.R. § 73.3555(d).
A “failed” station is one that has been dark for at least 4 months or is involved in court- supervised involuntary bankruptcy or involuntary insolvency proceedings. Under the  standard for “failing” stations, a waiver is presumed to be in the public interest if the  applicant satisfies each of the following criteria: (1) one of the merging stations has had an  all-day audience share of 4 percent or lower, (2) the financial condition of one of the  merging stations is poor, and (3) the merger will produce public interest benefits. Under  the standard for “unbuilt” stations, a waiver is presumed to be in the public interest if an  applicant meets each of the following criteria: (1) the combination will result in the  construction of an authorized but as yet unbuilt station and (2) the permittee has made  reasonable efforts to construct the licensed facility and has been unable to do so. (47  C.F.R. § 73.3555 Note 7 and In the Matter of Review of the Commission’s Regulations  Governing Television Broadcasting, ¶ 86, 14 FCC Rcd. 12903, 12941 (1999) (Local TV  Ownership Report and Order).
See 1996 Act, § 202(c), as amended by Consolidated Appropriations Act, 2004, Pub. L.  No. 108-199, § 629, 118 Stat. 3, 99. example, the newspaper/broadcast cross-ownership rule prohibits  ownership of a daily newspaper and television stations that serve the  same market.
FCC developed attribution rules to determine what interests should be  counted when applying these media ownership limits. FCC’s attribution  rules seek to identify those interests in or relationships to licensees that  confer on their holders a degree of influence such that the holders have a  realistic potential to affect the programming decisions or other core  operating functions of licensees. If an entity, such as a station  ownership group, is found to have an attributable interest in a station, that  station would be included when determining whether the entity has  exceeded FCC’s ownership limits.
FCC has several carriage and programming rules that are designed to  support the provision of local content by local television stations. These  rules set forth the conditions under which MVPDs carry stations’ content.  Some key rules that affect carriage and programming include:
Must carry and carry-one carry-all. The must carry and carry-one  carry-all rules address the right of television broadcast stations to  have their signals carried by MVPDs serving their markets. Stations  that select must-carry or carry-one carry-all status must be carried by  the MVPDs serving the station’s market, but receive no compensation  from the MVPDs.
Retransmission consent. Retransmission consent refers to  permission allowing an MVPD to retransmit a station’s signal when  the station chooses not to elect carriage through the must carry or  carry-one carry-all rules. By opting for retransmission consent,  stations give up the guarantee of carriage in exchange for the right to  negotiate for the terms of carriage, including potential compensation.  Retransmission rights are negotiated directly between a station and  the MVPD. We have previously found that after the 1992 Act was  enacted, negotiations for retransmission consent generally involved  “in kind” compensation to local broadcasters, such as carriage of new,  affiliated cable networks. However, in recent years, financial  compensation has become more common and retransmission fees  received by local stations have increased.
By statute, FCC is required to review its media ownership rules every 4  years—the quadrennial review—and determine whether any such rules  remain necessary in the public interest.
section_title: Television Stations Are Increasingly Sharing Services through a Variety of Broadcaster Agreements, but Data on the Prevalence of These Agreements Are Limited
subsections: section_title: Television Stations Can Share a Variety of Services through Broadcaster Agreements
paragraphs: Television stations can enter into agreements with other stations to share  or provide a variety of services. The agreements between stations can  involve either two or more stations sharing a resource or one station  providing a service to another station. Common services that can be  shared or provided between stations include:
News resources. Stations can enter into an agreement to share news- gathering resources, such as helicopters, reporters, cameramen,  video footage, and graphics. For example, in 2009, three television  stations in Phoenix, Arizona, entered into an agreement to share one  news helicopter for aerial footage of news stories and traffic reporting.
Production and delivery of programming. Two stations can enter into  an agreement wherein one station produces another station’s local  news. For example, in West Palm Beach, Florida, E.W. Scripps  Company station WPTV-TV (an NBC affiliate) produces newscasts for  Raycom-owned WFLX (a FOX affiliate) at 7:00 to 9:00 a.m., 4:00 to  4:30 p.m., and 10:00 to 11:00 p.m.
Program acquisition. Stations can enter into an agreement wherein  the licensee or owner of one station can negotiate another station’s  affiliation agreement with a broadcast network. For example, one  station group owner told us that it negotiated the renewal of affiliation  agreements at the request of the station owners that it has  agreements with.  Joint retransmission consent negotiations. A station owner can  contract out its retransmission consent negotiations with MVPDs to  another station owner, meaning that the retransmission consent fees  are handled during one negotiation, despite the fact that the stations  are not owned by the same company. As discussed later in this  report, in March 2014, FCC prohibited such arrangements if they  involve two or more separately owned top-four stations (based on  audience share) in the same market.
Advertising sales. A licensee or owner of a station can authorize  another station to sell its advertising time.
Station engineering. One station can provide technical support for  another station. For example, one station can monitor, maintain,  repair, and install another station’s technical equipment and ensure  the quality of the other station’s on-air technical performance.
Office services. One station can provide back office services for  another station, such as providing office space, accounting services,  and other general administrative services.
We identified four common types of agreements that may include  combinations of the services described above. In some cases, FCC has  established regulatory definitions for these agreements; in other cases, it  is a common industry term that may be used to characterize an  agreement, but there is no regulatory definition. The services provided by  or shared between stations fall under the following common types of  broadcaster agreements:  Joint sales agreement (JSA). A JSA is an agreement in which one  station is allowed to sell the advertising time for another station in  exchange for a percentage of the advertising revenues, a flat fee, or  some other consideration. For example, stations WEEK-TV and  WHOI-TV in Peoria, Illinois, entered into a JSA agreement in 2009.  According to the agreement, WEEK-TV sells advertising time and  provides other services for WHOI-TV in exchange for a monthly  commission equal to 30 percent of the total amount of net advertising  revenue that WEEK-TV sells for WHOI-TV.
Local marketing agreement (LMA). Also referred to as time  brokerage agreements, LMAs allow one or more parties other than  the station’s owner to purchase blocks of time and then provide  programming and sell advertising in that block of time. For example, in  Austin, Texas, KXAN (an NBC affiliate) entered into an LMA with  KNVA, an affiliate of The CW Network. Under the agreement, KXAN  provides news, sports, informational, and entertainment programming  to KNVA. According to the agreement, KXAN’s owner (LIN Media  LLC) has the sole right to sell advertising time to be placed in all  programming broadcasted on KNVA and also retains all advertising  revenues from the advertising sales. In exchange, KXAN’s owner  pays KNVA’s owner an annual fee for the duration of the agreement.
Local news service agreement (LNS). LNSs are agreements in which  multiple stations in a local market share news-gathering resources.  LNSs can include sharing photographers, news helicopters, or  satellite trucks to cover a news event. For example, stations can rely  on one camera crew shared by all participating stations to get footage  of a press conference rather than covering it individually.
Shared service agreement (SSA). SSA is a broad term that can  include a variety of services. SSAs can include arrangements wherein  one station produces another station’s news content and also  provides operational, administrative, and programming support. For  example, according to Nexstar Broadcasting Group, Inc.’s comments  filed with FCC in 2012, Mission Broadcasting Inc. paid Nexstar  approximately $7.2 million for producing more than 7,400 hours of  local news on 12 of its stations, and also for engineering, accounting,  and other back office administrative assistance provided under the  parties’ SSAs.
The various services provided by and shared between stations mentioned  above fall under the four common types of broadcaster agreements (see  table 1). Stations may have several agreements in place, such as an SSA  and JSA, or a single agreement that includes components typical of  different types of agreements. For example, according to a March 5,  2012, filing from the Coalition to Preserve Local TV Broadcasting, Fort  Wayne, Indiana, stations WISE-TV and WPTA (TV) operated under a  JSA and SSA agreement; WISE-TV provides news programming, sales,  and other back office services for WPTA (TV) and both stations transmit  from the same tower. Stakeholders told us that some companies have  relationships through which one company enters into a series of  broadcaster agreements to allow another company to provide the  services for most of its stations. For example, as mentioned above,  Mission Broadcasting, Inc. typically enters into broadcaster agreements  with Nexstar Broadcasting Group, Inc.
section_title: While Data Are Limited on the Number and Nature of Broadcaster Agreements, Stakeholders Report That Agreements Are Becoming More Prevalent
subsections: section_title: Data Limitations
paragraphs: Broadcast stations are required to maintain a “public file” that contains information about  each station’s operations and service. A station’s public inspection file includes a variety of  information, including political time sold or given away, data on ownership of each station,  and active applications each station has filed with the Commission. 47 C.F.R. § 73.3526. that agreement with the Commission. In April 2014, FCC released an  order requiring that stations file copies of JSAs with the Commission if the  JSA involves one entity’s selling more than 15 percent of another same- market station’s weekly advertising time. There are no similar filing  requirements for SSA and LNS agreements. However, in April 2014, FCC  requested comments on whether it should require stations to disclose  SSAs. Station owners must submit copies of all their agreements when  they file an application for a license assignment or transfer, which  typically occurs with a merger or acquisition, and they must describe any  agreements or contracts in their biennial ownership reports submitted to  FCC; however, this would not include SSAs or LNSs.
Some stakeholders have attempted to track the number and nature of  these agreements; however, these studies have limitations and do not  cover all the types of agreements. For example, BIA/Kelsey surveys  station personnel and reviews press releases to collect data on the  number of JSA and LMA agreements, but it does not track SSA or LNS  agreements. In addition, other stakeholders have reported on the  number of DMAs in which stations have an agreement, but the findings of  such reports have varied as the studies used different methodologies. For  example, some studies identified agreements by searching publicly  available documents while others contacted stations or MVPDs directly.
section_title: Prevalence of Agreements
paragraphs: Based on the JSA and LMA data available from BIA/Kelsey and from our  interviews with industry representatives, broadcaster agreements appear  to be less prevalent in large markets. In particular, while 4 percent of  stations in the largest 25 DMAs participated in a JSA or LMA, or both, in  February 2014, 20 percent of the stations in DMAs ranked 101 through  150 based on size participated in these agreements (see table 2 below).
Broadcasters and financial analysts told us that one factor contributing to  the greater use of agreements in small to medium markets is that stations  in these markets receive less advertising revenue than stations in large  markets. The Pew Research Center’s analysis of BIA/Kelsey data shows  that in 2011, stations in the largest 25 local television markets had  average revenues substantially greater than stations in smaller markets.  In particular, stations in the largest 25 DMAs received, on average,  advertising revenues of $57 million per year, while stations in DMAs  ranked 151 through 210 according to size received $3 million (see table  3). However, the costs of broadcasting (cameras, vehicles, bandwidth,  monitors, and other production infrastructure) can be similar across small  and large markets. Thus, broadcasters in small- and medium-sized  markets are more likely to enter into agreements to share or reduce  costs.
Stakeholders also noted that stations in small and medium markets may  be more likely to enter into agreements because FCC’s ownership rules  disproportionately affect stations in these markets. Specifically, as  mentioned previously, FCC rules allow a single entity to own two  television stations in the same DMA if at least one of the stations is not  ranked among the top four stations in terms of audience share and at  least eight independently owned and operating full-power television  stations would remain in the DMA. Small markets are less likely to have  enough stations to meet these requirements. For example, the smallest  market with 9 or more stations, which could support a merger, is the  Spokane, Washington, market. Thus, stations in smaller markets may  use broadcaster agreements to gain operating efficiencies that they  cannot obtain through common ownership.
The estimates are based on the Pew Research Center’s Journalism Project. The  estimates are for over-the-air advertising revenue, do not include digital or mobile  advertising revenue, and are based on Pew’s analysis of BIA/Kelsey data. own or control locally and nationwide. For example, as depicted in  figure 2, when Gannett acquired Belo’s television stations in 2013, it  entered into broadcaster agreements for stations that were located in  markets where Gannett already owned newspapers or stations and  was thus prohibited from taking ownership of those stations through  the merger. In one of the affected markets, Louisville, Kentucky,  Gannett owns The Courier Journal, a newspaper; to avoid violating  FCC’s cross-ownership rules, Gannett sold the newly acquired Belo  station, WHAS-TV, in Louisville, to Sander Operating Co. and entered  into agreements so that Gannett would handle all ad sales and  provide local news for the station.
section_title: Stakeholders Have Mixed Views on the Effects of Broadcaster Agreements on Television Programming and the Subscription Video Industry
subsections: section_title: Programming
paragraphs: Under 47 C.F.R. § 73.3555 (note 7), a failing station can get a waiver of the local  television limit to sell to an in-market broadcaster if it can show that the in-market  broadcaster is the only entity willing and able to operate the station. This requirement was  crafted in order to allow opportunities for new entrants, including minorities and women, to  purchase broadcast stations.
Station owners counter that these agreements do not necessarily lead to  duplicative local news programming and can, in fact, better serve  residents by providing news at different times. Station owners and a trade  association representative explained that even if two stations in the same  market are jointly owned or controlled, the local news on each station will  differ, because each station needs to draw viewers from different  audiences. For example, one station owner told us that providing the  exact same newscast on two different stations can lead to a  cannibalization of both stations’ audience ratings, advertising revenues,  and profits, so it is in the stations’ self-interest to maintain separate  identities and target different audiences. Station owners also noted that  agreements can be used to air news at different times of day. For  example, some station owners told us that a local FOX–affiliated station  may enter into an agreement to have a newscast produced by the local  ABC-, CBS-, or NBC-affiliated station, meaning that the FOX station can  air news at 10:00 p.m., while the other station airs its news at 11:00  p.m.40  In addition, broadcasters, station owners, and the financial analysts we  interviewed told us that agreements can result in economic efficiencies  that are needed in certain cases to allow a station to continue providing  any news at all. They added that the agreements have also provided  localism and diversity benefits by allowing some stations that previously  did not provide news to begin doing so, or to add additional local  programming. For example, in Wichita Falls, Texas, Nexstar’s NBC  station provides services that allowed the FOX station, which previously  did not air local news, to air a 9:00 p.m. newscast. Similarly, a trade  association told us that a JSA and SSA between stations owned by  Schurz Communications Inc. and Entravision Holdings LLC resulted in  the launch of Spanish-language news on a station in Derby, Kansas,  making it the first and only Spanish-language local television news  operation in the state. In our six case-study markets, some station owners  who had not entered into agreements stated that this was because their  station was strong economically and did not need an agreement.
The FOX network airs 2 hours of network programming in the evening whereas ABC,  CBS, and NBC air 3 hours. Thus, FOX affiliates can air their local news an hour earlier  than ABC, CBS, and NBC affiliates.
section_title: Subscription Video Industry
paragraphs: MVPDs voiced concerns about the impact of broadcaster agreements on  the subscription video industry. In some cases, stations involved in  broadcaster agreements enter into joint negotiations with MVPDs  regarding the retransmission consent fee the MVPDs will pay to carry the  stations. We heard of two ways in which joint retransmission negotiations  may occur:
Two or more separately owned stations located in the same market  enter into an agreement in which they are represented by one  negotiator who negotiates the retransmission consent fees for the  separately owned stations at once.  In the case of large station groups, the company may represent all of  its stations, as well as all of the stations it operates via broadcaster  agreements, during the negotiations.
MVPDs opposed the use of joint negotiations by separately owned  broadcast stations, particularly when the negotiations included multiple  top-four stations (typically ABC, CBS, FOX, and NBC) in one market.  MVPDs noted that the increased risk of losing more than one of the top- four stations in a given market gives the negotiating stations more  leverage over the MVPDs. MVPDs said that the increased leverage can  lead to higher retransmission consent fees that could be passed on to  consumers.
Station owners and two of three financial analysts we interviewed counter  that MVPDs overstated the extent to which joint negotiation of  retransmission consent affects the final retransmission consent fee, and  identified other factors affecting retransmission consent negotiations.  For example, we were told that in cases in which a broadcaster or station  group owns multiple stations, the MVPD and station owner negotiate the  retransmission consent terms for all of the owner’s stations across  multiple geographic markets. Station owners and MVPDs both noted that  in such a negotiation, the amount of leverage each party—the station  owner and MVPD—has depends on the overlap in the stations’ audience  size and the number of MVPD subscribers. For example, one MVPD  stated that if a station group owns stations in 70 percent of the MVPD’s  service area, then the station group has more leverage because a  programming blackout would affect a large percentage of the MVPD’s  subscribers than would be the case if the station group only covered 10  percent of the MVPD’s service area.
Comprehensive data are not available to evaluate the effect of  broadcaster agreements on retransmission consent fees, but FCC  recently took action to prohibit separately owned top-four stations in the  same market from engaging in joint retransmission consent negotiations.  Broadcasters and MVPDs have each submitted economic studies to FCC  supporting their positions, and a few individual MVPDs provided data to  FCC on how joint retransmission consent negotiations affected their  retransmission consent fees. However, comprehensive data on the extent  to which these agreements affect retransmission consent fees are not  available, because retransmission consent fee negotiations are subject to  non-disclosure agreements. Moreover, even if the retransmission consent  fees were publicly available, as we noted earlier, it is not always known  when stations are involved in a broadcaster agreement. On March 31,  2014, FCC adopted an order prohibiting separately owned, top-four  stations in the same market from entering into joint retransmission  consent negotiations with one another, or otherwise collaborating during  retransmission consent negotiations. In the order, FCC concluded that  joint negotiation by same market, separately owned top-four stations  eliminates price rivalry between and among stations that otherwise would  compete directly for carriage on MVPD systems and the associated  retransmission consent revenues. FCC added that joint negotiation gives  such stations both the incentive and the ability to impose on MVPDs  higher fees for retransmission consent than they otherwise could impose  if the stations conducted negotiations for carriage of their signals  independently.
DOJ took action in 1996 when three companies, each owning a network  affiliate in Corpus Christi, Texas, agreed not to enter into a retransmission  consent agreement with any cable operator until the operator had  reached an agreement with all three companies. In the complaint, DOJ  stated that the effect of this combination was to increase the price of  retransmission consent and to restrain competition among the defendants  in the sale of retransmission rights. DOJ officials told us that in this  case, the companies were not involved in any other agreements, such as  SSAs, and if they had been, DOJ would have evaluated whether there  were efficiencies derived from the agreements that would have balanced  against the anticompetitive effects.
section_title: FCC Has Not Completed a Review of the Use and Impacts of Broadcaster Agreements
subsections: section_title: FCC Evaluates Individual Broadcaster Agreements as Part of Its Review of Mergers and Acquisitions
paragraphs: FCC’s Media Bureau will also review agreements if they are challenged by an outside  party. For example, see In the Matter of KHNL/KGMB License Subsidiary, 26 FCC Rcd.  16087 (MB. 2011) (Memorandum Opinion and Order and Notice of Apparent Liability for  Forfeiture). approving the acquisition and corresponding agreements, the Media  Bureau noted that the provisions of the arrangements were similar to  agreements that it had approved in the past, and the agreements did not  implicate its attribution rules, which are discussed below.
FCC’s review of agreements that occur as part of a merger or acquisition  involves determining if the agreements constitute (1) an attributable  interest that should be counted under an entity’s ownership cap and (2)  an unauthorized transfer of control of the station. In addition, as  previously noted, when reviewing an application for a license assignment  or transfer, FCC must consider whether the transaction serves the public  interest, as required by the Communications Act.
subsections: section_title: Attributable Interests
paragraphs: FCC reviews sharing agreements to determine if they constitute an  attributable interest that should be counted under a licensee’s ownership  cap. As mentioned earlier, the broadcast attribution rules define which  financial or other interests in a licensee that must be counted in applying  the broadcast ownership limits. FCC’s attribution rules and corresponding  notes provide guidance to identify interests that create sufficient degrees  of influence in other licensees’ stations. For example, when an entity  programs more than 15 percent of a same-market station’s weekly  programming hours or sells more than 15 percent of a same-market  station’s weekly advertising time, it is deemed to have an attributable  interest. Station owners told us, therefore, that they write agreements to  avoid implicating the attribution rules.
section_title: Transfer of Control
paragraphs: Some broadcaster agreements have been challenged by consumer  groups, competing stations, and MVPDs on the grounds that they either  raise attribution issues or amount to an unauthorized transfer of control,  given the functions that a station may cede to another station. For  example, consumer groups have stated that agreements in which one  company provides the studio, production facilities, tower, and local news  for another company’s station, while also controlling the sale of  advertisements and entering into agreements such as securing the  station’s debt or receiving a percentage of the station’s profits, result in  the station owner ceding control of the station to another party.
FCC has previously stated that its analysis of transfer of control  “transcends formulas” and must be determined on a case-by-case  basis. FCC evaluates the following factors when determining who  controls a station:
Programming: Licensees must maintain ultimate control over their  station’s programming. Licensees may accomplish this by including  contractual language providing that the licensee retains the ultimate  authority over the selection and procurement of programming.
Personnel: FCC requires licensees to have at least one managerial  and one nonmanagerial employee at their stations, thus maintaining a  “meaningful staff presence” as required by the Commission’s main  studio rule. As long as the licensee meets this requirement and  retains ultimate control of station operations pertaining to personnel  responsibilities, the station providing services can place its employees  at the station receiving the services. For example, FCC officials told  us that if another station’s employees are performing work related to  functions the licensee of the station receiving services should control,  then the employees should report to the licensee’s managers.
Finances: Payment for services rendered in broadcaster agreements  may factor into a case-by-case determination of financial control. FCC  officials noted that ultimate authority for all aspects of a station’s  financial operations must rest with the licensee, and FCC’s analysis of  control may consider payments for services. For example, FCC has  previously approved agreements in which the licensee of the station  receiving services retained 70 percent of cash flow resulting from  operation of the licensee’s station. FCC has also approved previous  agreements where a flat fee for services rendered, as part of a  shared-service agreement, was combined with a split of advertising  revenue.
FCC has previously held that participation in an agreement does not  necessarily establish a transfer of control, even if the agreement  constitutes an attributable interest that should be counted under the  ownership cap. The licensee can delegate responsibility over a station  as long as the licensee sets basic policy and retains ultimate control over  the station. While there are some provisions codified in regulation,  stakeholders told us that they typically use previously approved  agreements as precedence on how to structure agreements so that they  will garner FCC approval. However, in March 2014, the Media Bureau  issued a notice stating that it would closely scrutinize applications for the  assignment or transfer of a license that propose that two or more stations  in the same market will (1) enter into an arrangement to share facilities,  employees, or services or to jointly acquire programming or sell  advertising and (2) enter into certain financial agreements, such as loan  guarantees or options to purchase the station. In explaining this notice,  the Media Bureau cited concerns that such arrangements may weaken  the economic incentive of licensees to control programming for their  stations.
section_title: FCC Has Not Completed a Review of the Use and Impacts of Broadcaster Agreements
paragraphs: Station owners and consumer groups both told us that the media  ownership rules have influenced the development of broadcaster  agreements. Station owners told us that by limiting the number of stations  an entity can own in a local market, the media ownership rules have led  companies to enter into broadcaster agreements as a means of realizing  economic efficiencies that they are unable to achieve through  acquisitions. Consumer groups have raised concerns that the use of such  agreements constitutes an “end-run” around the media ownership rules  because they amount to common ownership of two stations in the same  market. While both groups recognize the relationship between the media  ownership rules and broadcaster agreements, each group proposes  differing solutions. For example, station owners note that the agreements  are not as efficient as joint ownership and state that the media ownership  rules should be relaxed due to the increasing competition that broadcast  stations face from new media, such as Internet-delivered programming.  Conversely, consumer groups want the agreements made attributable  due to concerns that they increase media consolidation and reduce  viewpoint diversity.
Similarly, in February 2014, DOJ filed comments with FCC noting that  there has been a pronounced trend in broadcaster agreements that allow  one station to control another station that is nominally owned by a  separate entity, often called a “sidecar.” DOJ stated that its investigations  have revealed that these “sidecars” often exercise little or no competitive  independence from the station providing services and that the extent of  cooperation and integration with “sidecars” is so extensive that some  television-station ownership groups even consolidate the financials of  affiliated “sidecars” in their securities filings.
FCC has stated that it is unable to determine the extent to which  broadcaster agreements affect its media ownership rules and policy goals  of competition, localism, and diversity. In 2014, FCC noted that public  interest groups had raised meaningful concerns about the impact of  agreements on its policy goals, but also stated that broadcast  stakeholders had provided evidence that agreements may produce public  interest benefits. FCC concluded that it lacked information about the  scope and prevalence of broadcaster agreements and, thus, could not  conduct a thorough analysis of the impact of the agreements on its rules  and policy goals. Yet federal standards for internal control, which provide  the overall framework for identifying and addressing major performance  and management challenges, note the importance of obtaining  information from external stakeholders that may have a significant impact  on an agency achieving its goals.
To some extent, this uncertainty exists because FCC has not collected  data or completed a review to understand how broadcaster agreements  are being used and the potential impacts with respect to its media  ownership rules and the corresponding policy goals of competition,  localism, and diversity. Specifically, FCC has not collected  comprehensive data to determine the number of agreements, the  services provided through the agreements, and other relevant data to  provide useful context, such as the market and station characteristics  associated with the use of agreements. FCC has instead relied on  comments from stakeholders on these issues and its experience  reviewing individual transactions. As part of its 2010 Quadrennial Review  of its ownership rules, FCC requested comment on making LNSs and  SSAs attributable, and on how to determine the impact of such  agreements on its policy goals of competition, localism, and diversity,  but it has not completed the review. FCC continued its assessment of  these issues in its 2014 Quadrennial Review. Specifically, FCC’s notice  for its 2014 Quadrennial Review stated that it needed additional  information to assess whether additional regulation of agreements is  warranted, and solicited comments on requiring the disclosure of SSAs,  tentatively defining the term in a manner that would include LNS  agreements. In the 2014 notice, the Chairman indicated that he  instructed the Media Bureau to complete the review by June 30, 2016.
The lack of comprehensive data and the long delays in completing FCC’s  review makes it difficult to objectively determine the effect of the  agreements on FCC’s policy goals of competition, localism, diversity.  Broadcasters, station owners, and consumer groups have provided  counterarguments about the effect of broadcaster agreements on FCC’s  media ownership rules and its policy goals of competition, localism, and  diversity. FCC has also recognized the benefits and potential harms  associated with these agreements and has approved a number of  agreements that occurred as part of a merger or acquisition. However,  without conducting a fact-based analysis of how agreements are being  used, FCC cannot ensure its current and future policies on broadcaster  agreements serve the public interest.
section_title: Conclusions
paragraphs: Congress and FCC have long recognized the valuable role that local  television stations play in informing citizens, and have adopted rules and  regulations to ensure that broadcasters are serving the public interest.  FCC seeks to achieve competition, localism, and diversity through its  media ownership rules; however, restrictions on local television station  ownership have remained largely unchanged since 1999. Meanwhile, the  media marketplace is rapidly evolving and offering consumers a variety of  platforms for receiving information and programming, including a number  of Internet-based sources. This has led to increased competition between  broadcast stations and other media platforms for viewers, content, and  advertising. In addition, broadcaster agreements appear to be increasing  and evolving with respect to the types of services provided. While few  disagree that broadcaster agreements have evolved partly in response to  FCC’s restrictions on media ownership, broadcast stations and consumer  groups offer varying perspectives on whether the agreements positively  or negatively affect FCC’s policy goals of competition, localism, and  diversity.
FCC has recognized both sides of the issue, noting that broadcaster  agreements can provide important public interest benefits, such as  helping a struggling station improve its operations and adding local news  programming in a market, but these agreements can also create  relationships that would be viewed as joint ownership under FCC’s  existing regulations. FCC has also recognized that in certain  circumstances, its policy goals of competition, localism, and diversity may  conflict, such as in cases where preventing consolidation leads to less  economically healthy stations that cannot invest in local news. Given the  complexity of regulating an evolving industry, FCC would benefit from  improved data on and analysis of the extent to which broadcaster  agreements affect its media ownership rules and its media policy goals of  competition, localism, and diversity. However, FCC has not completed a  study of and lacks basic data on broadcaster agreements. This lack of  analysis and information could undermine FCC’s efforts to ensure its  media ownership regulations achieve their intended goals.
section_title: Recommendation for Executive Action
paragraphs: FCC should determine whether it needs to collect additional data to  understand the prevalence and context of broadcaster agreements. FCC  should also evaluate whether broadcaster agreements affect its media  policy goals of competition, localism, and diversity.
section_title: Agency Comments
paragraphs: We provided a draft of this report to FCC for review and comment. In  written comments, reproduced in appendix II, FCC agreed with our  recommendation. FCC also noted that it has taken initial steps to address  the recommendation. In particular, FCC noted that in the 2014  Quadrennial Review, it proposed defining a category of sharing  agreements and requiring their disclosure.
As agreed with your office, unless you publicly announce the contents of  this report earlier, we plan no further distribution until 30 days from the  report date. At that time, we will send copies to the Chairman of the  Federal Communications Commission and the appropriate congressional  committees. In addition, this report will be available at no charge on  GAO’s website at http://www.gao.gov.
If you or your staff have any questions about this report, please contact  me at (202) 512-2834 or goldsteinm@gao.gov. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. GAO staff who made key contributions to this  report are listed in appendix III.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: The objectives of this report were to examine (1) the uses and prevalence  of broadcaster agreements in the television industry; (2) stakeholders’  views on the effects of broadcaster agreements on programming and the  subscription video industry; and (3) the extent, if at all, that the Federal  Communications Commission (FCC) has regulated these agreements.
To assess how broadcaster agreements are used in the television  industry, we first identified the different types of broadcaster agreements  through a literature search and review of prior GAO reports, academic  studies, industry and advocacy reports, and media articles. We also  reviewed the descriptions and definitions of broadcaster agreements  provided in FCC regulations and rulemakings. We obtained specific  examples of agreements from filings submitted to FCC by broadcasters,  station owners, and public-interest groups, as well as descriptions of  agreements reported by station owners in press releases, and U.S.  Securities and Exchange Commission 10-K and 10-Q filings. We verified  information from the literature review through interviews with FCC and  Department of Justice (DOJ) officials. We also interviewed a variety of  stakeholders, including representatives of broadcast networks, television  broadcast station owners, multichannel video programming distributors  (MVPDs),1 trade associations, labor groups, consumer groups, financial  analysts, and other individuals with knowledge of the broadcast industry.  We selected local television station owners and MVPDs that filed  comments in FCC’s media ownership proceeding and that varied in the  number of stations they owned or the number of subscribers they served,  respectively; we selected other stakeholders by reviewing prior GAO  reports, academic studies, and comments filed in FCC media ownership  proceedings, and through recommendations from other interviewees.
MVPD refers to cable operators, satellite providers, and telecommunications companies  that provide subscription video services to consumers. told us that broadcaster agreements are less common in those markets  and likely to have less impact in those markets. We divided the remaining  markets into three separate groups based on market size. We randomly  ordered the markets within each stratum and selected the first DMA listed  in each of the three stratums to conduct the case study. If there was a  broadcaster agreement in the selected market, we then matched it with a  similarly-sized market without an agreement, and if a chosen market did  not have a broadcaster agreement, we looked for a similarly-sized market  with an agreement. To determine whether stations in a market  participated in a broadcaster agreement, we used the Warren Television  and Cable Factbook, FCC’s website, stations’ public inspection files, and  a BIA/Kelsey database to identify full-power commercial and non- commercial stations within each DMA. We then used the above- mentioned sources, press releases, news articles, a Georgetown  University study, a University of Delaware study, and data from MVPDs,  to identify whether any broadcaster agreements exist within the three  selected markets.
After the 6 case study markets were selected, we contacted and  interviewed station owners to learn more about the specific broadcaster  agreements being used in the selected DMA. In addition, we contacted  cable companies in the DMAs we identified having agreements to learn  more about how or if the broadcaster agreements within their respective  DMAs affected the retransmission consent fee negotiations. In the DMAs  we identified as not having an agreement, we contacted and interviewed  owners of the top-four stations in the market. We defined a broadcaster  agreement as any instance where two or more independently owned  stations within the same DMA have entered into any of the following  agreements:  time brokerage agreement/local marketing agreement,  shared service agreement, joint sales agreement, and local news service  agreement. We did not include instances where a station entered into a  broadcaster agreement with another separately-owned out-of-market  station because we focused on FCC’s local ownership rules, which limit  the number of stations a company can own within a market. In addition,  we did not include low power or translator stations, but we did include  satellite stations. The three DMAs that we selected that had a  broadcaster agreement were Casper-Riverton, Wyoming, Topeka,  Kansas, and Paducah, Kentucky.  The three DMAs we selected that did  not have a broadcaster agreement were Mankato, Minnesota, Columbia- Jefferson City, Missouri, and Madison, Wisconsin.3    To assess what is known about the prevalence of broadcaster  agreements, we interviewed stakeholders about the comprehensiveness  of data collected by FCC, private-sector, public-interest, and academic  sources on the number of broadcaster agreements nationwide. In  addition, we acquired data from BIA/Kelsey, a market-research firm, to  assess the prevalence of certain types of agreements, the stations  involved in the agreements, and the size of the market served by the  stations. We analyzed BIA/Kelsey data on television markets, stations,  and agreements. We tested the reliability of BIA’s data by reviewing  stakeholder opinions on the reliability and accuracy of the data, reviewing  existing information about the data, and obtaining information from BIA  officials about how they collect the data. We found the data sufficiently  reliable for our purposes. We also examined FCC regulations and  interviewed FCC officials to understand the extent to which broadcasters  are required to disclose broadcaster agreements and the methods for  doing so.
To determine stakeholders’ views on the effects of broadcaster  agreements on programming and the subscription video industry, we  reviewed FCC dockets and interviewed representatives of broadcast  networks; local television station owners; cable, satellite, and other  subscription video service providers; trade associations; labor groups;  consumer groups; financial analysts; and other individuals with  knowledge of the broadcast industry to obtain their views and identify any  supporting studies and data on the effects of broadcaster agreements.  We also conducted literature reviews to identify any relevant studies on  the effects of broadcaster agreements.
To determine the extent to which FCC has regulated broadcaster  agreements, we reviewed relevant FCC dockets and rulings and  interviewed FCC officials. In addition, we interviewed the previously  mentioned stakeholders to gain their perspective on the extent to which  broadcaster agreements affect FCC’s policy goals.
During interviews with the station owners in the Madison, Wisconsin, market, we learned  of a local news service agreement in that market. However, as our case studies were  selected as illustrative examples only, the presence of such an agreement does not pose  a methodological limitation to our review.
We conducted this performance audit from July 2013 to June 2014 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusion based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
section_title: Appendix II: Comments from the Federal Communications Commission
section_title: Appendix III: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
paragraphs: Mark L. Goldstein, (202) 512-2834 or goldsteinm@gao.gov.
section_title: Staff Acknowledgments
paragraphs: In addition to the contact named above, Michael Clements, Assistant  Director; Amy Abramowitz; Richard Bulman; Crystal Huggins; Bert  Japikse; Sara Ann Moessbauer; Josh Ormond; Amy Rosewarne; and  Rebecca Rygg made key contributions to this report.