The Appellate Court of the District of Columbia struck down the Federal Communications Commission rule preventing one company from owning a TV station and a cable system in the same market. Additionally, the court asked the FCC to review the rule that prevents one company from owning stations representing more than 35% of U.S. TV households.
For advertisers, the message of the ruling is clear: This is not good news-and some say it hints of monopolistic practices.
"It eliminates competition," said Allen Banks, exec VP-executive media director, North America for Publicis Groupe's Saatchi & Saatchi, New York. "Right now, you have all these station duopolies [two or more stations owned by one company] in certain markets. ... That's not a healthy situation."
Duopolies are not new. But the ruling means they could increase in number. And that's not the worst of it for advertisers: If a conglomerate such as AOL Time Warner owned NBC stations, for example, it could limit access for advertisers in cities where it also owned the local cable system. "The choices are that much fewer," said Mr. Banks.
Industry watchers expect a seismic shift in the media landscape. The ruling immediately sent business analysts and TV executives scrambling to decipher all possible combinations of new network/station/cable companies. The move paves the way for media conglomerates such as AOL Time Warner-second-largest owner of cable systems in the U.S.-the opportunity to buy broadcast network and TV station owners such as General Electric Co.'s NBC, should GE decide to sell. Comcast Corp., which will be the largest U.S. cable system operator with its pending purchase of AT&T Broadband, could also make a play for NBC, according to media executives.
John Rash, senior VP-director national broadcast negotiations at Interpublic Group of Cos.' Campbell Mithun, Minneapolis, said, "If any growing [media] entities instead use it to simply leverage price," he said, "it won't have been a positive development for advertisers." But "if media companies pass on the economies of scale to their marketing partners, it can be a winning formula for both."
Initial potential deals would seemingly benefit individual local cable systems by increasing their ad rates. Selling, for example, a package including time on an individual TV station and an individual cable system to local advertisers would give the cable system more leverage in a specific market. "There is the belief that even if you don't have operating benefit-having one management running two stations-they'll still have the advantage if you can block booking advertising," said Jeffrey Logsdon, analyst for Gerard Klauer Mattison, Los Angeles.
A station-cable system package would improve cable's profile among advertisers as well. "There are an awful lot of cable systems that haven't a clue about how to run an advertisers' schedule with any kind of integrity," said Mr. Banks. "That's not to say there aren't cable systems or interconnects that aren't legitimate opportunities-there are just aren't enough of them." Interconnects sell time on multiple cable systems in a metro area to compete with local stations.
As a result of the ruling, business analysts expect major networks to buy smaller station groups, mostly their own affiliate stations. News Corp.'s Fox Broadcasting owns stations representing 39% of U.S. TV households, making it the largest TV station group, according to the FCC. Viacom, which is buying KCAL Los Angeles for $650 million, is next with 38.2%. Both are over the 35% limit. Fox got an exemption from the FCC, and Viacom hopes to get the same.
Broadcast networks may eventually own stations representing 50% of U.S. households or more, according to a number of executives.
Stock-market analysts believe the most action in buying and selling won't necessarily come from the AOL Time Warners, Viacoms and Comcasts of the world, but from medium-size station operators and cable systems that stand to lose any competitive edge they have to even bigger media concerns unless they wheel and deal.
"There is always going to be constant pressure for those [midlevel] guys to get enough scale to stand up to programmers, and advertisers, and networks, and cable and [satellite] systems," said Victor Miller, entertainment security analyst for Bear, Stearns & Co. All these moves could still be a long way off, since the decision will have legal challenges. Even then, the FCC has the authority to decide what merger deals are in the public interest. Additionally, the Justice Department could step in to block some potential cross-ownership deals on antritrust grounds.
contributing: david goetzl and ira teinowitz