Broadcast Exclusivity Rules: Effects of Elimination Would Depend on Other Federal Actions and Industry Response
Published: 2015-04-14T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Local television stations negotiate with content providers—including national broadcast networks, such as ABC—for the right to be the exclusive provider of content in their markets. FCC's network non-duplication and syndicated exclusivity rules (“exclusivity rules”) help protect these contractual rights. In 2014, FCC issued a further notice of proposed rulemaking (FNPRM) to consider eliminating or modifying the rules in part to determine if the rules are still needed given changes in recent years to the video marketplace.
GAO was asked to review the exclusivity rules and the potential effects of eliminating them. This report examines (1) industry stakeholder views on the need for and effects of the exclusivity rules and (2) the potential effects that removing the exclusivity rules may have on the production and distribution of content, including local news and community-oriented content.
GAO reviewed all 31 comments filed by industry stakeholders with FCC in response to its FNPRM. GAO also interviewed 27 of those industry stakeholders and FCC officials. GAO also analyzed—in light of general economic principles—stakeholder views on the potential effects of eliminating the rules.
FCC reviewed a draft of this report and provided technical comments that GAO incorporated as appropriate.
section_title: What GAO Found
paragraphs: Broadcast industry stakeholders that GAO interviewed (including national broadcast networks, such as ABC, and local television stations) report that the exclusivity rules are needed to protect local television stations' contractual rights to be the exclusive providers of network content, such as primetime dramas, and syndicated content, such as game shows, in their markets. These stakeholders report that by protecting exclusivity, the rules support station revenues, including fees from cable operators paid in return for retransmitting (or providing) the stations to their subscribers (known as retransmission consent fees). Conversely, cable industry stakeholders report that the rules limit options for providing high-demand content, such as professional sports, to their subscribers by requiring them to do so by retransmitting the local stations in the markets they serve. As a result, these stakeholders report that the rules may lead to higher retransmission consent fees, which may increase the fees households pay for cable service.
Based on GAO's analysis of industry stakeholder views, expressed in comments to the Federal Communications Commission (FCC) and interviews, eliminating the exclusivity rules may have varying effects.
If the rules were eliminated and cable operators can provide television stations from other markets to their subscribers (or “import” a “distant station”), local stations may no longer be the exclusive providers of network and syndicated content in their markets. This situation could reduce stations' bargaining position when negotiating with cable operators for retransmission consent. As a result, stations may agree to lower retransmission consent fees. This potential reduction in revenues could reduce stations' investments in content, including local news and community-oriented content; the fees households pay for cable television service may also be affected. Because multiple factors may influence investment in content and fees, GAO cannot quantify these effects.
If the rules were eliminated, other federal and industry actions could limit cable operators' ability to import distant stations. For example, if copyright law was amended in certain ways, cable operators could face challenges importing distant stations. A cable operator could be required to secure approval from all copyright holders (such as the National Football League) whose content appears on a distant station the cable operator wants to import; with possibly hundreds of copyright holders in a day's programming, the transaction costs would make it unlikely that a cable operator would import a distant station. Also, broadcast networks may be able to provide oversight of retransmission consent agreements if FCC rules were to allow it. Cable operators may only import distant stations if retransmission consent agreements with those stations permit it, and stations' agreements with broadcast networks generally prohibit stations from granting such retransmission. If FCC rules allowed it, broadcast networks could provide oversight to help ensure such agreements do not grant retransmission outside the stations' local markets. Under these two scenarios, local stations may remain the exclusive providers of content in their markets, their bargaining position may remain unchanged, and there may be limited effects on content and fees for cable service.

section_title: Letter
paragraphs: Local television stations often provide national content, such as national  news and primetime dramas, and local content, such as local news and  emergency alerts, over the air to the public. Many of these stations are  affiliated with national broadcast networks, such as the “top four”  networks—ABC, CBS, Fox, and NBC. Despite the availability of free over- the-air content, about 85 to 90 percent of U.S. households pay for and  receive television service from a multichannel video programming  distributor (MVPD), such as a cable or satellite operator, which provides a  secondary transmission (or retransmission) of local television stations’  content, as well as transmission of cable networks unavailable over the  air. Local television stations generally obtain the exclusive right to air  content in their local markets through negotiations and contracts with  national broadcast networks that supply national news and sports and  primetime shows, and syndicators that provide content such as game  shows and reruns. The Federal Communications Commission’s (FCC)  network non-duplication and syndicated exclusivity rules (exclusivity  rules) help local television stations enforce these exclusive rights, in part  by requiring cable operators to block duplicative network and syndicated  content; specifically, cable operators must block duplicative content when  they retransmit the signal of a television station from another market (a  “distant market”) in a local station’s market. For example, if a cable  operator retransmits (or “imports”) WTVR, the CBS affiliate in Richmond,  Virginia, in Washington, D.C., the exclusivity rules allow WUSA, the CBS  affiliate in Washington, to require the cable operator to block the duplicate  national CBS and syndicated content as long as WUSA has received  rights from CBS and the providers of syndicated content to be the  exclusive provider of such content in the Washington, D.C. market and  has appropriately invoked those rights.
In 2014, FCC issued a further notice of proposed rulemaking (FNPRM) to  consider eliminating or modifying the exclusivity rules, in part to  determine if the rules are still needed given changes to the video  marketplace since the rules were first promulgated in 1966 (network non- duplication rule) and 1972 (syndicated exclusivity rule). You asked us to  review FCC’s exclusivity rules and the potential effects of removing them.  This report examines (1) industry stakeholder views on the need for and  effects of the exclusivity rules and (2) the potential effects that removing  the exclusivity rules may have on the production and distribution of  content, including local news and community-oriented content.
To address these objectives, we reviewed and analyzed all public  comments submitted by industry stakeholders in response to FCC’s  FNPRM regarding the potential elimination or modification of the  exclusivity rules. Our review included 31 formal comments filed by  industry stakeholders that included cable and satellite operators, national  broadcast networks, local television stations, industry associations, and  content copyright holders. We analyzed these comments, focusing on  stakeholder views on the need for and effects of the rules and the  potential effects of eliminating the rules. We also conducted semi- structured interviews with 27 industry stakeholders, including  broadcasters, cable and satellite operators, industry associations, and  content copyright holders that filed comments with FCC regarding these  issues. We interviewed FCC officials regarding the rules. We also  interviewed industry analysts that study the broadcasting and cable  industries; we selected industry analysts by identifying analysts who study  and make recommendations on the stocks of publicly traded companies  that we interviewed as part of our review and whom we had interviewed  on prior engagements. We reviewed prior GAO reports that cover related  issues. We also conducted a literature search and did not find any studies  directly relevant to our work. For our second objective, in addition to  gathering information about industry stakeholders’ views, we also  analyzed those views in light of general economic principles to  understand more fully the potential effects of eliminating the exclusivity  rules. For more information on our scope and methodology, see app. I.
We conducted this performance audit from October 2014 through April  2015 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: Flow of Television Content
paragraphs: Many entities are involved in the production and distribution of television  content to households, as shown in figure 1. Local television stations may  acquire network content from the national broadcast networks that they  are affiliated with, such as CBS; from syndicators for syndicated content,  such as game shows and reruns; or from both. Stations also create their  own content, including local news. Stations provide content to households  directly through over the air transmission, which households can receive  free of charge, and through retransmission by MVPDs, such as cable and  satellite operators. Content producers, such as Sony and Disney, also  distribute content through cable networks, such as ESPN, that are carried  by MVPDs. “Over-the-top” providers, such as Netflix, provide content to  consumers through Internet connections often provided by MVPDs.
According to FCC, local television stations’ affiliation agreements with  networks and contracts with syndicators generally grant a station the  right to be the exclusive provider of that network’s or syndicator’s content  in the station’s local market. Broadcasting industry stakeholders and  economic theory note that exclusive territories can provide economic  benefits to local television stations, broadcast networks, and viewers.  Local television stations benefit from being the exclusive providers in their  markets of high-demand network content, such as professional sports  and primetime dramas. Being the exclusive provider supports stations’  viewership levels, which strengthens their revenues, allowing them to  invest in the production of local content, among other things. For  broadcast networks, exclusivity can help increase the value of each local  station and create efficiencies in the distribution of network content. Thus,  while exclusive territories reduce competition between some stations  (e.g., local NBC stations in different geographic markets do not compete),  the exclusive territories could provide incentives for stations to invest  more heavily in the development of content and thus promote greater  competition between stations in the same geographic market (e.g., local  ABC and NBC stations in the same market compete), which can benefit  viewers.
section_title: Exclusivity Rules and Related Rules and Laws
paragraphs: FCC’s exclusivity rules are an administrative mechanism for local  television stations to enforce their exclusive rights obtained through  contracts with broadcast networks and syndicators.
Network non-duplication. This rule protects a local television station’s  right to be the exclusive provider of network content in its market.  FCC promulgated the rule in 1966 to protect local television stations  from competition from cable operators that might retransmit the  signals of stations from distant markets. FCC was concerned that the  ability of cable operators to import the signals of stations in distant  markets into a local market was unfair to local television stations with  exclusive contractual rights to air network content in their local market.  The rule allows exclusivity within the area of geographic protection  agreed to by the network and the station, so long as that region is  within a radius of 35 miles—for large markets—or 55 miles—for small  markets—from the station (see fig. 2).
Syndicated exclusivity. This rule protects a local television station’s  right to be the exclusive provider of syndicated content in its market.  FCC first promulgated the rule in 1972 to protect local television  stations and ensure the continued supply of content. This rule  applies within an area of geographic protection agreed to by the  syndicator and the station, so long as that region is within a 35-mile  radius from the station.
The exclusivity rules—when invoked by local television stations—require  cable operators to block duplicative content carried on a distant signal  imported into the station’s protected area by cable operators. For  example, these rules allow WJZ, the CBS-affiliated local television station  in Baltimore, to prohibit a cable operator from showing duplicative  network content on another market’s CBS station that the cable operator  imports into Baltimore. Similarly, the rules allow WJZ to prohibit a cable  operator from showing any duplicated syndicated content on any other  market’s station the cable operator imports into Baltimore. Local television  stations are able to invoke the exclusivity rules regardless of whether their  signals are retransmitted by a cable operator or not. For example, even if  WJZ is not retransmitted by a particular cable operator in Baltimore, WJZ  can invoke its exclusivity rights against that cable operator, requiring it to  block duplicative content. FCC has statutory authority to administratively  review complaints of violation of these rules (e.g., if a local television  station believes a cable operator imported a distant signal into its market  even though the station invoked its exclusivity protections) when such  complaints are formally brought before the Commission. FCC officials  said that the Commission addresses such complaints on a case-by-case  basis.
The broadcast industry is governed by a number of other rules and  statutes that interplay with the exclusivity rules. These rules and laws  include the following:
Must carry. Must carry refers to the right of a local television station to  require that cable operators that serve households in the station’s  market retransmit its signal in that local market. The choice to invoke  must carry is made every 3 years by stations. Cable operators  carrying stations under the must-carry rule may not accept or request  any fee in exchange for coverage.
Retransmission consent. Retransmission consent refers to permission  given by television stations who do not choose must carry to allow a  cable or satellite operator to retransmit their signals. Stations invoke  either retransmission consent or must carry. Retransmission consent  was enacted in 1992; at the time, Congress determined that cable  operators obtained great benefit from the broadcast signals that they  were able to carry without broadcaster consent, which resulted in an  effective subsidy to cable operators. Retransmission rights are  negotiated directly between a local television station and cable and  satellite operators. By opting for retransmission consent, stations give  up the guarantee that cable and satellite operators will carry their  signal under must carry in exchange for the right to negotiate  compensation for their retransmission. Cable and satellite operators  are unable to retransmit the signal of a local television station that has  chosen retransmission consent without its permission. If, despite  negotiations, a local television station and a cable or satellite operator  do not reach agreement, the local television station may prohibit the  cable or satellite operator from retransmitting its signal, commonly  referred to as a “blackout.” FCC rules require local television stations  and cable or satellite operators to negotiate for retransmission  consent in “good faith.” FCC’s rules set a number of good faith  standards, including a requirement that parties designate an individual  with decision-making power to lead negotiations.
Compulsory copyright. Must carry and retransmission consent pertain  to the retransmission of a local television station’s signal. The content  within that signal is protected by copyright. For example, the National  Football League (NFL) holds the copyright for its games that are  broadcast on CBS, Fox, and NBC. Generally, any potential user  (other than the copyright holder) intending to transmit copyright  protected content must obtain permission from the copyright holder  beforehand. The compulsory copyright licenses, enacted in 1976,  allow cable operators to retransmit all content on a local television  station without negotiating with the copyright holders. To make use  of the compulsory copyright, the cable operator must follow relevant  FCC rules and pay royalties to the Copyright Office within the Library  of Congress. The Copyright Act establishes the royalties that a cable  operator must pay to carry television stations’ signals. A cable  operator pays a minimum royalty fee regardless of the number of local  or distant television station signals it carries, and the royalties for local  signals are less than those for distant signals.
section_title: Flow of Fees, Revenues, and Compensation in the Broadcasting Industry
paragraphs: Compensation for television content flows through industry participants in  a number of ways that are relevant to the exclusivity rules, as seen in  figure 3.
Households that subscribe to television service with an MVPD pay  subscription fees; FCC reported that the average monthly fee for  expanded-basic service was $64.41 on January 1, 2013. Those MVPDs,  including cable and satellite operators, pay retransmission consent fees  to local television stations that opt for retransmission consent; as  discussed above, the fees are determined in negotiations between  stations and MVPDs. Advertisers purchase time from local television  stations, broadcast networks, and MVPDs. Local television stations  provide compensation to their affiliated national broadcast networks and  to the providers of syndicated content in exchange for the rights to be the  exclusive provider of that content in their market. Local television stations  also use their advertising and retransmission consent revenues to  develop their own content, including local news.
section_title: FCC Rulemaking on Exclusivity Rules
paragraphs: In 2014, FCC issued a FNPRM to consider eliminating or modifying the  exclusivity rules, in part to determine if the rules are still needed given  changes to the video marketplace since the rules were first promulgated.  FCC asked for comments on, among other things, the potential effects of  eliminating the rules. In response to the FNPRM, FCC received 72  records during the open comment period, including letters from  individuals, and comments and reply comments from industry  stakeholders. FCC officials said that the Media Bureau is working on a  recommendation for the FCC Chairman’s consideration on whether to  repeal or modify the exclusivity rules; there is no firm timeframe for when  the bureau may make a recommendation.
section_title: Industry Stakeholders Have Differing Views of the Need for and Effects of Exclusivity Rules
subsections: section_title: Broadcast Industry Stakeholders Report That Exclusivity Rules Are Needed to Protect Exclusive Rights and Support Production of Local Content
paragraphs: All 13 broadcast industry stakeholders (local television stations, national  broadcast networks, and relevant industry associations) we interviewed  and whose comments to FCC we reviewed report that the exclusivity  rules are needed to help protect stations’ exclusive contractual rights to  air network and syndicated content in their markets. Those stakeholders  reported that the rules provide an efficient enforcement mechanism to  protect the exclusivity that local television stations negotiate for and  obtain in agreements with networks and syndicators; in the absence of  the rules, enforcement of exclusivity would have to take place in the  courts, which would be difficult and inefficient for several reasons.
These stakeholders report that if a local television station believes that  a cable operator improperly imported duplicative content on a distant  signal into its market, the station will be unable to bring legal action to  stop the airing of this duplicative content. Specifically, the cable  operator may have an agreement with a station in a distant market  that allows it to retransmit that station’s signal in other markets. Since  the affected local station might not have a contract with either the  cable operator that is importing the distant station or the distant  station, these stakeholders report that the local station cannot bring  legal action. In 2012, for example, cable operator Time Warner Cable  (TWC) did not reach a retransmission consent agreement with Hearst  broadcast stations in five markets. TWC’s contract with another  broadcaster, Nexstar, did not explicitly prohibit retransmission of  Nexstar’s signals into distant markets, and TWC imported Nexstar  stations into Hearst’s markets. However, according to one broadcast  industry stakeholder, because of a lack of contractual relationship  between Hearst and TWC regarding the retransmission of Nexstar’s  signals, it would have been very difficult for Hearst to take a breach of  contract action.
Even if a local station could bring legal action, these broadcast  industry stakeholders added that enforcing exclusivity through courts  would be more time consuming and resource intensive than using  FCC administrative review to determine or uphold exclusive rights that  parties negotiated in contracts.
Furthermore, all 13 broadcast industry stakeholders we interviewed and  whose comments to FCC we reviewed report that exclusivity rules are  needed to help protect stations’ revenues. These stakeholders report that  because the rules protect the contractual exclusivity rights of local  television stations, stations can maintain their bargaining position in  retransmission consent negotiations with cable operators, allowing them  to obtain what they consider to be fair retransmission consent fees based  on the value of the content in their signal. If a local station does not grant  a cable operator retransmission consent, the cable operator cannot  provide any network or syndicated content that the station provides,  including high-demand content. By contrast, if cable operators could  import duplicative content on a distant signal, even on a temporary basis  to avoid not showing national network content during a retransmission  consent impasse, these stakeholders report that the bargaining position  of local television stations will decline, with a commensurate decline in  retransmission consent fees and the value of the local television station,  as the station will no longer be the exclusive content provider. In addition,  because the rules ensure that local television stations’ audiences are not  reduced by the availability of duplicative content on signals from distant  markets (for example, all households in a given market who watch  popular NBC prime-time dramas will do so on their local NBC affiliate, as  households are unable to do so on a NBC station from another market),  they report that the rules help protect their audience share. This in turn,  allows local television stations to obtain higher advertising revenues than  they would if they were not the exclusive provider of network and  syndicated content in their market. These broadcasting industry  stakeholders also reported that by strengthening local stations’ revenues,  the rules help them invest in developing and providing local news,  emergency alerts, and community-oriented content, in support of FCC’s  localism goals.
However, the majority of cable industry stakeholders we interviewed and  whose comments to FCC we reviewed reported that many local television  stations have reduced their investments in local news in recent years  despite the existence of the rules. In addition, we previously found that  local television stations are increasingly sharing services, such as  equipment and staff, for local news production. For example, stations  can have arrangements wherein one station produces another station’s  news content and also provides operational, administrative, and  programming support. In addition, viewership for local news has declined  in recent years—according to the Pew Research Center’s analysis of  2013 Nielsen data, the viewership for early evening newscasts had  declined 12 percent since 2007. During this time, Americans have  increasingly turned to other devices—such as computers and mobile  devices—to access news on the Internet. For example, the Pew  Research Center also reported in 2013 that 54 percent of Americans said  they access news on mobile devices and 82 percent said they do on a  desktop or laptop computer.
section_title: Cable Industry Stakeholders Report That Exclusivity Rules Lead to Increased Retransmission Consent Fees
paragraphs: Eight of 12 cable industry stakeholders we interviewed and whose  comments to FCC we reviewed reported that because the rules help local  television stations be the exclusive provider of network content in their  market, the rules allow local television stations to demand increasingly  higher retransmission consent fees from cable operators, which some  said can lead to higher fees that households pay for cable television  service. Because local television stations are the exclusive providers of  network content in their markets (e.g., the NBC affiliate in San Diego is  the only provider of popular NBC prime-time dramas in that market),  cable operators report that they are forced to pay increasingly higher  retransmission consent fees. They report that this occurs because if a  local television station cannot reach agreement with the cable operator  regarding retransmission consent and does not grant retransmission  rights to the cable operator, the cable operator cannot import a signal  from a distant market to provide network content and the cable operator’s  subscribers lose access to network content. This puts the cable operator  at risk for losing subscribers to competitors, such as other cable and  satellite operators, who continue to carry the local television station and  its network content. While 5 of 12 cable industry stakeholders we  interviewed and whose comments to FCC we reviewed said that they  prefer to retransmit the local station instead of a distant market station,  they feel that the exclusivity rules limit their ability to seek alternatives if  they are unable to agree to retransmission consent fees with a local  station. Eight cable industry stakeholders reported that as a result, the  rules have led to sharp and rapidly increasing retransmission consent  fees in recent years—a trend that they expect to continue—which can  lead to higher cable fees for households. SNL Kagan, a media research  firm, has projected that retransmission consent fees will increase from  $4.9 billion in 2014 to more than $9.3 billion in 2020. However, 4 of 13  broadcast industry stakeholders we interviewed and whose comments to  FCC we reviewed stated that cable networks—such as ESPN, TBS, and  AMC—also have exclusive distribution. For example, a cable operator  wishing to carry ESPN can only obtain rights to do so from ESPN.
section_title: The Effects of Eliminating the Exclusivity Rules on Content Depend on Related Federal Actions and the Response of Industry Participants
paragraphs: Industry stakeholders we interviewed and whose comments to FCC we  reviewed discussed different scenarios under which eliminating the  exclusivity rules may lead to varying effects (see fig. 4). In one scenario,  eliminating the exclusivity rules may provide cable operators with  opportunities to import distant signals into local markets. This could  potentially reduce the bargaining position of local television stations in  retransmission consent negotiations, which could reduce station revenues  with varying effects on the availability of content and households;  however, the magnitude of these effects is uncertain. In two other  scenarios, eliminating the exclusivity rules may have little effect as local  television stations could maintain their position as the exclusive provider  of network and syndicated content. As a result, retransmission consent  negotiations may be unlikely to change, likely resulting in minimal effects  on content and households.
subsections: section_title: If Contractual Exclusivity is Difficult to Enforce, Removing the Exclusivity Rules May Have Uncertain Effects on Content and Fees Households Pay for Television Service
paragraphs: Eleven of 13 broadcast industry stakeholders we interviewed and whose  comments to FCC we reviewed said that in the absence of the exclusivity  rules, some local television station contracts with cable operators may  allow for retransmission of their signals to distant markets. This may  happen if contracts between local television stations and cable operators  do not clearly prohibit retransmission outside of the stations’ local  markets, as was the case in Nexstar’s contract with TWC discussed  earlier. Two of these stakeholders said this could happen with small  broadcasters that might lack the financial resources to cover legal  counsel during their negotiations with cable operators. Broadcast  networks could provide such assistance. However, officials from all three  broadcast networks we interviewed told us that they currently do not  oversee their affiliates’ retransmission consent agreements. In comments  to FCC, one cable industry association suggested that FCC prohibit  network involvement in the retransmission consent negotiations of their  affiliates. Depending on how FCC interprets or amends its good-faith  rules, broadcast networks may be unable to take a more active role in the  retransmission consent negotiations between their affiliates and cable  operators. Even if just one local television station allowed a cable  operator to retransmit its signal outside its local market, the cable  operator could retransmit that signal in any other market that it served;  this could potential harm the exclusivity of local television stations  affiliated with the same broadcast network in those markets served by the  cable operator.
The potential ability of a cable operator to import a distant signal, and the  potential weakening of exclusivity that could result, may lead to a series  of effects on the distribution of content—including local content—and on  households and the fees they pay for cable television service (see fig. 5).
The majority of both cable and broadcast industry stakeholders we  interviewed and whose comments to FCC we reviewed stated that as a  result of the potential of a cable operator retransmitting a distant station’s  signal into a local market, local television stations may have reduced  bargaining position during retransmission consent negotiations with cable  operators. As stated earlier, the fact that local television stations are the  exclusive provider in their markets of high-demand national content  provides them with a strong bargaining position in negotiations with cable  operators. However, if during retransmission consent negotiations, a  cable operator can provide certain content by retransmitting the signal of  a station affiliated with the same broadcast network in another market, the  local station’s bargaining position declines because it is no longer the  exclusive provider of the national network content available to the cable  operator in the station’s market. This reduction in bargaining position may  lead to fewer black outs and a reduction in retransmission consent fees.
With the exclusivity rules in place, a local television station may be  willing to pull its signal from a cable operator (that is, have a blackout)  knowing that the cable operator has no alternative for providing high- demand network and syndicated content. However, without the  rules, the local television station may be less willing to pull its signal  from the cable operator, as the cable operator could provide the same  high-demand content to its customers by importing a station from a  distant market. For example, if a cable operator in Baltimore could  import the Atlanta NBC affiliate into Baltimore when it does not reach  a retransmission consent agreement with the Baltimore NBC affiliate,  the Baltimore affiliate stands to gain little from pulling its signal, and  thus not be retransmitted, since households served by the cable  operator in Baltimore could still access NBC network content on the  imported Atlanta station. With fewer blackouts, consumers would be  less likely to lose access to broadcast network and syndicated content  they demand.
With reduced bargaining position, local television stations may agree  to retransmission consent fees that are lower than they otherwise  would be because local television stations want to avoid their signals  being replaced by another television station’s signal from a distant  market. This may mean that retransmission fees could decrease or  increase at slower rate than they would if broadcasters maintained the  same bargaining position they have now. For example, the NBC  affiliate in Baltimore may be willing to accept lower retransmission  consent fees from a cable operator knowing that the cable operator  can import NBC content from another market if they did not reach  agreement on retransmission consent.
In addition, to the extent that a cable operator does import a distant signal  into a given market, the local station in that market may lose some  viewers who watch duplicative content on the imported station. To the  extent this happens, advertisers may spend less on advertising time given  the reduction in audience and the advertising revenues of the local  television station may decline.
The potential reduction of local stations’ retransmission consent and  advertising revenues could affect the content stations can produce and  distribute to households, including local content, in multiple ways, as  described below. However, the nature of these effects is unknown.
Local television stations may have fewer resources to pay in  compensation to their affiliated broadcast networks. If so, the  resulting reduction in revenues for national broadcast networks may  reduce their ability to produce, obtain, and distribute high-cost and  widely viewed content, such as national sports and primetime dramas.  This potential outcome may result in the migration of some content to  cable networks to the extent that cable networks outbid broadcast  networks for this high-cost content (e.g., if ESPN outbids Fox for NFL  coverage or more high-cost dramas are provided by the cable network  AMC instead of broadcast networks). If this happens, consumers  who rely on free over-the-air television and do not subscribe to cable  television service may not be able to view certain content that has  traditionally been available on over-the-air television unless they begin  to subscribe to a cable operator’s service.
Twelve of 13 broadcast industry stakeholders we interviewed and  whose comments to FCC we reviewed said that local television  stations may have fewer resources to invest in local content. This  could reduce the quality or quantity of local content provided to  viewing households. Nine of these stakeholders reported that local  news is a major cost for local television stations.
Local television stations may have fewer resources to pay for  syndicated content. If so, syndicators could be less able to produce,  obtain, and distribute syndicated content, which could affect the type  and quantity of syndicated content that households are able to view.
In addition to these potential changes in content, eliminating the  exclusivity rules may affect the fees consumers pay for cable television  service. However, because multiple factors may influence fees and the  extent to which that happens is unknown, we cannot quantify the effect.  To the extent that eliminating the exclusivity rules causes retransmission  consent fees paid by cable operators to be lower than they otherwise  would be, cable operators may pass some of these savings along to  consumers in the form of lower subscription fees. However, as we have  noted, eliminating the rules could lead to a migration of some highly  viewed and high-cost content to cable networks from free over-the-air  local television stations. This content migration could also affect fees for  cable service; cable networks that obtain such content may experience  additional costs for content and thus charge cable operators more to carry  their networks. Thus, cable operator cost savings on retransmission  consent fees could be offset to some extent by higher cable network fees.  Furthermore, migration of such content could cause some households  that do not subscribe to cable services to begin doing so, or cause some  households to upgrade their service to obtain additional cable networks.  This increased demand for cable service could also lead to some upward  pressure on cable subscription fees.
section_title: If the Distant Signal Compulsory Copyright Is Repealed, Removing the Exclusivity Rules May Have Minimal Effect
paragraphs: Eleven of 13 broadcast industry stakeholders we interviewed and whose  comments to FCC we reviewed stated that in the absence of the  exclusivity rules, the compulsory copyright license for distant signals may  allow a cable operator to retransmit a local television stations’ signal into  another market as the cable operator does not need to obtain approval  from copyright holders. Nine of these 13 stakeholders stated that this  compulsory copyright may not have been enacted if the exclusivity rules  did not already exist.  Six of these 13 stated that, as a result, if FCC  eliminates the exclusivity rules, statutory changes would also be needed  to eliminate the compulsory copyright license for distant signals.
Assuming that retransmission of the content in a televisions station’s  broadcast retains copyright protection, if Copyright Law was amended to  remove the compulsory copyright for distant signals, a cable operator  wishing to retransmit a station’s signal into a distant market would need to  clear the copyrights with the copyright holders, such as the NFL, of all  content included on the television station’s signal. However, we have  previously found that obtaining the copyright holders’ permission for all  this content would be challenging. Each television program may have  multiple copyright holders, and rebroadcasting an entire day of content  may require obtaining permission from hundreds of copyright holders.  The transaction costs of doing so make this impractical for cable  operators. Furthermore, as broadcast networks are also copyright  holders for some content that their affiliated local television stations air,  such as the network’s national news, they may be unwilling to grant  such copyright licenses to cable operators wishing to retransmit that  content on an distant signal, given networks’ interests in preserving their  system of affiliate exclusivity, as discussed earlier. In such a scenario,  cable operators may be unable to import distant signals and local  television stations may not face the threat of duplicative network and  syndicated content on a distant signal. Local television stations may  retain the same bargaining position that they currently have during  retransmission consent negotiations. As a result, there may not be any  change in the likelihood of a blackout, retransmission consent fees, the  quantity and quality of content, and fees for cable television service.
section_title: If Local Television Station Contracts with Broadcast Networks and Cable Operators Ensure Exclusivity, Removing the Exclusivity Rules May Have Minimal Effect
paragraphs: Nine of 12 cable industry stakeholders we interviewed and whose  comments to FCC we reviewed suggested that if the exclusivity rules  were eliminated, there may be minimal effects as exclusivity would  continue to exist in contracts. According to FCC, the affiliation  agreements between local television stations and broadcast networks  generally define exclusive territories for the affiliate stations and prohibit  stations from granting retransmission consent outside their local markets.  However, as we discussed earlier, only one local television station  granting retransmission consent outside its local market to a cable  operator could undermine the exclusivity of all the affiliates of a broadcast  network in markets served by that cable operator. Broadcast industry  stakeholders report that broadcast networks could take legal action  against local television stations that violate terms of the affiliation  agreements by granting retransmission consent outside their local  market. However, two broadcast networks we interviewed said that they  are reluctant to sue their affiliates because they prefer not to take legal  action against their business partners; one added that such a suit could  take a long time to be resolved.
Depending on FCC’s interpretation of or amendment to its good-faith  rules, local television stations and broadcast networks may be able to  take actions to protect against stations’ granting retransmission consent  outside their local markets, thereby protecting stations’ exclusive  territories. Assuming FCC’s good faith rules permit such actions,  broadcast networks may choose to take a more proactive role in their  affiliates’ retransmission consent negotiations with cable operators. As we  discuss earlier, networks have an incentive to maintain stations’ exclusive  territories and potentially could provide input to stations’ retransmission  consent negotiations to help prevent stations’ granting retransmission  consent outside their local markets if that input is allowed under FCC’s  interpretation of the good-faith rules. For example, if FCC found it  permissible, networks potentially could provide suggested contract  language that clearly limits retransmission by cable operators to the  station’s local market.
With contracts clearly protecting the exclusivity of local television stations  and preventing cable operators from retransmitting signals to distant  markets, cable operators may be unlikely to import distant signals as  doing so would be a clear contractual violation of their retransmission  consent contract. In this scenario, local television stations may retain their  exclusivity and may not have any change to their bargaining position  during retransmission consent negotiations. Therefore, stations’  retransmission consent fees and revenue, the quantity and quality of  content, and cable subscription fees may not change.
section_title: Concluding Observations
paragraphs: FCC’s exclusivity rules are part of a broader broadcasting industry legal  and regulatory framework, including must carry, retransmission consent,  and compulsory copyrights. The exclusivity rules predate many of these  laws and rules, and in some instances, the development of these other  laws was premised on the existence of the exclusivity rules. The effects of  eliminating the exclusivity rules are uncertain, because the outcome  depends on whether related laws and rules are changed and how  industry participants respond. For example, if the compulsory copyright  license for distant signals were eliminated, as some broadcast industry  stakeholders suggest, removing the exclusivity rules may have little  effect. In contrast, if FCC were to interpret good faith in its rules to limit  the extent to which broadcast networks can influence retransmission  consent negotiations between their affiliated stations and cable operators,  as one cable industry association suggests, removing the exclusivity rules  could lead to a series of events, the outcome of which could be a  reduction in the quality or quantity of local content and potential changes  in the fees households pay for cable television service.
section_title: Agency Comments
paragraphs: We provided a draft of this report to FCC for review and comment. FCC  provided technical comments via email that we incorporated as  appropriate.
We are sending copies of this report to interested congressional  committees and the Chairman of the FCC. In addition, the report will be  available at no charge on the GAO 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 significant 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) industry stakeholder  views on the need for and effects of the exclusivity rules and (2) the  potential effects that removing the exclusivity rules may have on the  production and distribution of content, including local news and  community-oriented content.
To address both objectives, we reviewed all public comments filed by  industry stakeholders with the Federal Communications Commission  (FCC) as part of its further notice of proposed rulemaking (FNPRM)— FCC docket 10-71—considering elimination or modification of the network  non-duplication and syndicated exclusivity rules (exclusivity rules). We did  not review comments filed by individuals and only reviewed those from  industry stakeholders, such as local television stations or companies,  multichannel video programming distributors (MVPD), including cable and  satellite operators, national broadcast networks, industry associations  representing such companies, and content copyright holders. In total, we  reviewed 31 public comments. Of those 31 comments, 14 were from  broadcasting industry stakeholders, 13 were from cable industry  stakeholders, 1 was from a satellite industry stakeholder, 1 stakeholder  was both a broadcaster and a cable operator, 1 was from a content  provider, and 1 was from a related industry association. We reviewed  these public comments for stakeholder views on the rules, the current  effects of the rules, and the potential effects of eliminating the rules.
In addition, we reviewed relevant rules and statutes, such as FCC’s  exclusivity rules and relevant rulemaking documents, such as FCC’s  FNPRM. We also reviewed affiliation agreements between broadcast  networks and local television stations relevant to recent legal action  regarding the exclusivity rules. We did not review retransmission consent  agreements between local television stations and cable operators,  however, as these agreements are not publicly available.
We also conducted a literature review for studies related to FCC’s  exclusivity rules, including any studies focused on the potential effects of  eliminating the rules. To identify existing studies from peer-reviewed  journals, we conducted searches of various databases, such as EconLit  and ProQuest. We searched these and other databases using search  terms including “exclusivity,” “network non-duplication,” and “syndicated  exclusivity” and looked for publications in the past 5 years. We reviewed  studies that resulted from our search and found that none of them were  directly relevant to our work. We reviewed prior GAO reports that cover  relevant issues, such as retransmission consent and copyrights.
We also conducted semi-structured interviews with the industry  stakeholders that filed public comments with FCC as part of its FNPRM  considering eliminating or modifying the exclusivity rules. In some cases,  multiple stakeholders co-signed and co-filed public comments; in these  instances, we interviewed at least one of those stakeholders. While we  attempted to interview at least one stakeholder for each of the 31 formal  comments filed, four stakeholders did not respond to our requests for  interviews. We interviewed 1 content provider, 13 broadcast industry  stakeholders, 12 cable industry stakeholders, and 1 satellite industry  stakeholder. During these interviews, we asked stakeholders about their  views of FCC’s exclusivity rules, the effects of the rules, and the effects of  potentially eliminating the rules on retransmission consent fees,  broadcaster revenues, and the distribution of content, including locally- oriented content, among other things. In addition, we interviewed selected  industry analysts who study the broadcasting and cable industries  regarding the rules and the potential effects of eliminating the rules. We  selected analysts to interview by identifying ones who analyze and make  recommendations on the stocks of publicly traded companies that we  interviewed as part of our review and whom we had interviewed as part of  prior engagements. We also interviewed FCC officials regarding these  rules and FCC’s rulemaking process.
For our second objective, in addition to gathering information about  industry stakeholder views on the potential effects of eliminating the  exclusivity rules, we also analyzed those views in light of general  economic principles to understand more fully the potential effects of  eliminating the exclusivity rules.
section_title: Appendix II: 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 above, Michael Clements, Assistant Director;  Amy Abramowitz; Mya Dinh; Gerald Leverich; Josh Ormond; Amy  Rosewarne; Matthew Rosenberg; and Elizabeth Wood made key  contributions to this report.