MEDIA INDUSTRY M&A REGULATORY CONSIDERATIONS

Regulation plays a major role in determining the structure of the communications industry in the United States. It is necessary to understand the role of regulation before analyzing the specifics of merger and acquisition activity in the communications industry.

The communications industry is subject to unique regulation. This is due to three factors: (a) mass-media serve a special First Amendment role; (b) broadcasters are licensed to use a scarce resource, the electromagnetic spectrum, and cable operators are franchised to use a scarce resource, public rights of way; and (c) within at least some markets, newspapers have cost structures that preclude economic competition (i.e., they are natural monopolies).

The special First Amendment role served by the media has proved to be

a powerful tool with respect to preventing government regulation of the print industry. However, broadcast entrepreneurs continue to enjoy less than full First Amendment rights due to continued adherence to the theory that broadcasters are public trustees who are granted a limited privilege to use a scarce public resource (the electromagnetic spectrum). The U.S. Su- preme Court has yet to fully determine the extent to which cable operators enjoy First Amendment rights. However, the outcome of recent Supreme Court cases, such as Turner Broadcasting System, Inc (1997), suggests that cable operators’ First Amendment rights will ultimately fall somewhere be-

TABLE 3.1

Announced Media Mergers & Acquisitions 19872002 (Dollars in Millions)

Film Production

Date Cable/Broadcasting

Number of Deals 1987

124 73 Source. Thomson Financial.

TABLE 3.2

Largest Media M&A Transactions 19872002 (Dollars in Millions)

Acquirer Short Business RankValue of Deal Date

($mil) 01/10/00 Time Warner

Target Name

Target Business

Acquirer Name

Description

Film/Publishing America Online Inc Internet Service Provider 181,568.461 07/08/01 AT&T Broadband

72,041.150 06/24/98 Tele-Communications Inc

Cable TV

Comcast Corp

Cable TV

Telecommunications 69,896.491 04/22/99 MediaOne Group Inc

Cable TV

AT&T Corp

Telecommunications 51,873.866 09/07/99 CBS Corp

Cable TV

AT&T Corp

40,882.163 10/04/99 AMFM Inc

Broadcasting

Viacom Inc

Cable TV

22,735.392 07/31/95 Capital Cities/ABC Inc

Broadcasting

Clear Channel

Broadcasting

18,280.392 03/04/89 Warner Communications Inc Film/Music

Broadcasting

Walt Disney Co

Film/Parks

Publishing company 15,113.400 08/15/00 Infinity Broadcasting Corp

Time Inc

13,649.042 03/13/00 Times Mirror Co

Broadcasting

Viacom Inc

Cable TV

Publishing Company 11,628.231 Source. Thomson Financial.

Publishing

Tribune Co

3. STRUCTURE AND CHANGE

tween those possessed by the print media and those possessed by broadcasters. Use of such an intermediate First Amendment model will likely result in much of the current approach to regulating cable surviving constitutional scrutiny.

The criteria for gaining and keeping a broadcast license are of great sig- nificance to M&A activity in this area. As trustees of a scarce resource, the electromagnetic spectrum, broadcast station entrepreneurs are licensed to serve the public interest convenience, and necessity (47 U.S.C.A. Sec. 309(a)). As a result licensees are subject to periodic review (8 years for both television and radio licensees; 47 U.S.C.A. Sec. 307(c)(1)), and the FCC must approve any station transfer (47 U.S.C.A. Sec. 310(d)). Most station trans- fers are approved without incident. However, all parties in a transfer must comply with the FCC’s rules and procedures in these areas to avoid unnec- essary and costly delay. Another area of interest is cable regulation. His- torically, most economists have believed that cable is a natural monopoly. As a result, very few of the nation’s cable systems face direct competition from a multichannel wire-line competitor. However, regulators tried to cre- ate a more competitive multichannel video marketplace by passing the Telecommunications Act of 1996. In spite of the fact that the 1996 Act allows Local Exchange Carriers (i.e., telephone companies) to enter the cable business as either traditional cable operators, traditional common carriers or as open video systems, cable entrepreneurs currently face only a small amount of direct wireline multichannel competition from overbuilders. However, cable faces significant multichannel television competition from Direct Broadcast Satellite (DBS) providers DirecTV and EchoStar. In the long run, Congress’ decision (in the 1996 Act) to move away from a monopoly regulatory approach and toward a competitive approach can be expected to have a significant impact on cable merger and acquisition activity. Ultimately, increased competition increases entrepreneurial risk. Thus, cable entrepreneurs can be expected to utilize varying merger and acquisition activities depending on their perception of the expected impact of competition on the long-term prospects of the cable marketplace.

In general, newspapers have not been subjected to the extensive regulatory schemes established for broadcasting and cable. As a result, the primary regulation of newspaper M&A activity occurs through traditional antitrust oversight. The one exception is the Newspaper Preservation Act (1970) under which the U.S. Department of Justice may allow two directly competing same market daily newspapers to form a joint operating agreement (JOA) for the purpose of combining their business operations while preserving their editorial independence. Because the premise of the policy is the Failing Firm Doctrine, the Justice Department must determine that one of the two newspapers would exit the market in the absence of a JOA in order to approve the merger as a permissible exception to the antitrust laws.

OZANICH AND WIRTH

In addition to the general regulatory considerations discussed here, a number of FCC ownership rules have had a significant impact on the structure of the marketplace under which media M&A activity has occurred. Of most immediate concern is the FCC’s regulation of television and radio station ownership. Such regulation takes three primary forms: limits on aggre- gate or national ownership (i.e., multiple ownership); limits in local markets (i.e., duopoly and crossmedia ownership); and limits on network interest in program ownership and distribution. It is the relaxation of these rules during the past several years that has led to a substantial increase in merger and acquisition activity and increased industry consolidation. In particular, the re- scinding of the FCC’s financial interest and syndication rules paved the way for many large transactions by allowing for vertical integration between television networks and program production and distribution interests. Like- wise, Congress’ liberalization of the Radio Duopoly Rules and its elimination of a cap on the number of radio stations an entrepreneur can own nationally led to an explosion of merger and acquisition activity in this segment.

Although the media (particularly broadcast and cable) are subject to national and local ownership constraints, limitations on crossmedia ownership, and some limitations on vertical integration, the foci of these constraints are on who the purchaser is, not on the nature of the transaction. Thus, the transfer of media properties, whether through an acquisition or merger, is not subject to any additional special considerations. An example of this was a review by the FCC of a request by Storer Communications to intercede during a hostile tender offer to the company’s shareholders by an outside company. Storer management requested intercession based on financial disruption and the Public Interest Standard. In this case, the FCC acted to prevent Storer from insulating itself from the challenge and re- mained neutral during the proxy challenge (Storer Communications, 1985).

MEDIA INDUSTRY M&A REGULATORY CONSIDERATIONS