The FCC’s Eight Voices Rule

 

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Kevin W. Caves and Hal J. Singer have worked on antitrust issues in a number of industries, including telecommunications. This article is based on a paper they filed with the FCC on behalf of the National Association of Broadcasters.

The Federal Communications Commission’s (FCC’s) Eight Voices Rule prohibits mergers between television stations in the same Designated Market Area (DMA) unless at least eight independently owned and operating broadcast television stations would remain in the DMA following the transaction. (To count for purposes of the Rule, those stations may be either commercial or non-commercial but must be full-powered.) Because most DMAs have fewer than eight stations, the Rule prevents television station mergers in most DMAs. Although intended to promote competition, the Rule departs from basic principles of economics and antitrust.

The antitrust analysis of a merger often starts with the definition of a relevant market, but the Eight Voices Rule ignores that exercise and simply assumes that local broadcast television is the relevant product market. Thus, competition from non-broadcast competitors is ignored, even though the FCC recently recognized that local advertisers have a number of non-broadcast options, including regional cable networks and geographically targeted Internet-based advertising platforms.

The refusal to consider non-broadcast competitors ignores dramatic changes to the broadcast industry’s competitive environment. Broadcast television has been losing viewers and market share to non-broadcast competitors. Video programming markets have become increasingly fragmented, and competition for viewers and local advertising dollars has intensified. Hundreds of non-broadcast channels are now available through cable and direct-broadcast satellite. New entrants, such as Amazon, Hulu, and Netflix, now offer programming over the Internet. There is also substantial evidence of robust and rapidly expanding competition from Internet-based and mobile advertising. The FCC itself found in its most recent Video Competition Report that local advertising revenues are greater for Internet providers than for local broadcast television.

The Eight Voices Rule is contrary to the procedures followed by the U.S. antitrust agencies. The Rule sets up an unrebuttable presumption that a merger is anticompetitive based only on a count of the number of competitors, a crude measure of concentration. The Department of Justice (DOJ) and Federal Trade Commission (FTC) use a different measure of market concentration, the Herfindahl-Hirschman Index (HHI), as a screen to determine if a merger needs further investigation. They then consider a variety of other types of evidence to determine if the merger is anticompetitive.

In contrast, if there are fewer than eight independent stations in the DMA after the proposed merger, the FCC blocks the transaction with no further investigation. Mergers must be blocked even if they would result in concentration below the thresholds that the antitrust agencies’ Horizontal Merger Guidelines state would create a rebuttable presumption of market power. Even accepting the limitation of the market to include only broadcast stations, a merger that results in a market with fewer than eight stations post-merger might also result in an HHI that the Guidelines would describe as unconcentrated. Moreover, partially accounting for non-broadcast competition would imply that the typical local programming market is unconcentrated under conventional antitrust standards.

Furthermore, the evidence that the antitrust authorities would consider in their merger analysis, and the FCC ignores, includes information that often would indicate a merger of broadcast stations is not anticompetitive. For example, the DOJ and FTC would consider whether the threat of new entry and the expansion of smaller competitors would prevent anticompetitive behavior post-merger. Once non-broadcast competitors are considered, many DMAs have experienced a significant amount of recent entry and expansion.

The standard antitrust analysis of a merger also considers the possibility that the merger will result in efficiencies. There is substantial evidence that common ownership of television stations in local markets can lead to substantial efficiencies owing to economies of scope and scale—efficiencies that have been found to result in production of greater amounts of local news programming. Nonetheless, the Eight Voices Rule ignores efficiencies.

Econometric analysis supports the view that the Eight Voices Rule does not promote competition. Panel regressions can be used to estimate the relationship between the number of independent stations in a DMA and local advertising rates. Regression can control for other factors that could affect those rates, such as a DMA’s income, population, and demographics. Results from regressions like these showed that DMAs with fewer than eight stations do not have higher local advertising rates than DMAs with eight or more stations. In fact, a reduction in the number of independently owned stations serving a DMA is statistically associated with a decrease in local advertising prices. These findings are consistent with the view that mergers of broadcast stations may often lead to significant cost savings. They are inconsistent with the assumptions underlying the Eight Voices Rule.

The Eight Voices Rule is arbitrary and ignores evidence that is important to the proper antitrust analysis of a merger. Thus, it fails to advance the FCC’s objective of promoting competition. Moreover, the Rule proscribes transactions that would likely result in significant cost savings with little increase in market concentration. Such mergers would likely be deemed procompetitive under conventional competition analysis.

The FCC is periodically required to examine its media ownership rules, and to eliminate any that have become obsolete. Unfortunately, the Commission declined to modify the Eight Voices Rule when it completed its most recent Quadrennial Review in August of 2016. In a dissenting statement, Commissioner Pai cited the regression study extensively, and concluded that “the eight-voices test lacks any foundation in economics or the realities of today’s television marketplace. Indeed, repealing that test would promote competition and localism in the video marketplace.”