ECONOMICS AND CHANGING REGULATIONS

The changing fortune of AM and FM radio provide a clear example of how market adjustments result in regulatory changes. Edwin Armstrong in- vented FM radio in the 1930s as a way of overcoming interference problems associated with AM service. FM (frequency modulation) is a means of encod- ing information on a carrier wave by varying the frequency. AM (amplitude modulation) encodes information by varying the strength of the carrier signal. AM is more susceptible to interference because outside sources of energy—atmospheric static, electric motors, or other devices—interact with the carrier wave to produce static. FM is not affected by such phenomena because the amplitude of the carrier remains constant and outside energy fluctuations do not affect the frequency. The net result of this technical dif- ference is that FM made possible a system superior to the one that devel- oped during the first decade of American broadcasting. AM broadcasting currently occupies 535-1705 kHz on the broadcast frequency spectrum and FM occupies 88-108 MHz.

After Armstrong secured patents for his FM system in 1933, he was in- vited to test his invention at RCA’s Empire State Building facilities. Once he proved the superiority of his system, Armstrong believed that his friend David Sarnoff, head of RCA, would use the new technology to revolution- ize the radio industry. Although initial test were more successful than even

54 CORN-REVERE AND CARVETH

Armstrong expected, RCA was slow at promoting the new system. In fact, Sarnoff opposed allocation of spectrum for FM broadcasting at FCC hear- ings in 1936. Instead, Sarnoff urged that the spectrum be reserved to test television.

The reasons underlying RCA’s position were not difficult to understand. Promoting FM service would undermine the company’s investment in AM facilities. Moreover, FM was in competition with television for spectrum allocation and RCA owned television patents. One historian has noted that “in almost every overt and covert action, it can be seen that RCA (and the majority of the AM industry) was trying to forestall something that would either cut down, or cut out, their operation” (Erickson, 1973).

The FCC finally allocated spectrum for commercial FM service in 1941. Four years later, however, the Commission moved FM service to another part of the frequency band. Justified as a means of avoiding interference caused by sunspots, the move was supported primarily by AM interests and adopted over the objections of the FCC’s engineering staff. In a single order, all existing FM receivers were rendered obsolete. This action, along with several intervening regulatory measures, helped keep FM a second-class radio service for decades.

By 1964, FM radio was not in good financial shape. Many of the existing 1,300 FM stations were largely dependent on the revenues of more successful co-owned AM stations for their survival. As a result, the FCC initiated a rulemaking proceeding designed to promote FM as an independent service. This led to a rule prohibiting FM stations from duplicating more than 50% of the programming of co-owned AM stations in the same local area (Report and Order, 1964). The regulation was designed to serve two goals. First, it sought to strengthen FM service by forcing the creation of an independent programming service. Second, the Commission believed that a separate programming service would encourage consumers to buy and use FM receivers.

Ten years later, the FCC revisited the AM–FM duplication rules because the number of independent FM stations had increased, as had their revenues and the number of FM receivers. The economic advances of FM service led the Commission to strengthen the nonduplication prohibition. It limited the FM station of an AM/FM combination to not more than 25% duplication of either station in communities of 25,000 population or larger (Re- port and Order, 1976).

Further upheavals in the radio marketplaces led to even more profound changes. In 1986, the FCC found that “FM service is now a fully competitive and viable component of the radio industry” and that FM had captured more than 70% of the radio audience (Amendment, 1986, p. 1613). The number of FM stations had tripled between 1964 and 1986, far eclipsing the growth of AM service. Indeed, the FCC determined that “many heretofore

2. ECONOMICS AND MEDIA REGULATION

profitable AM stations are now experiencing economic difficulties as a result of the shift of listeners to FM stations” (p. 1614). After examining the “structure and market conditions that have occurred in the radio industry in recent years” the Commission concluded that “the program duplication rule no longer appears necessary or desirable” (p. 1612). Consequently, it eliminated nonduplication rules because they were no longer necessary to foster independent FM service. The FCC also sought to help the now-ailing AM stations.

In 1991, the FCC suggested that it might reimpose the nonduplication rule as part of a package to save AM radio from economic demise. As part of

a comprehensive set of changes, the Commission proposed weeding out marginal AM stations, in part by perhaps depriving stations of their ability to cut programming costs by simulcasting the FM signal of co-owned stations (Review of the Technical Assessment Criteria for the AM Broadcast Service, 1991). The FCC subsequently eliminated the duopoly rule in 1994, to allow for an owner to have more than one AM station per market, and raised national ownership caps. With this proposal, the FCC came full circle with regulations originally adopted in 1964—suggesting changes born en- 3 tirely of the economic state of the industry.

ECONOMICS AND CHANGING REGULATIONS