FTC Staff Comment Before the Federal Communications Commission In the Matter of Evaluation of the Syndication and Financial Interest Rules

V910013
COMMISSION AUTHORIZED
BEFORE THE
FEDERAL COMMUNICATIONS COMMISSION
WASHINGTON, D. C. 20554
In The Matter of
Evaluation of the Syndication
and Financial Interest Rules
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)
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MM Docket No. 90-162
Additional Comment of the Staff of
the Bureau of Economics
of the Federal Trade Commission·
March 25, 1991
• This comment represents the views of the staff of the Bureau of Economics
of the Federal Trade Commission. 	They are not necessarily the views of the
Commission or any individual Commissioner. Inquiries regarding this comment
should be directed to Bruce H. Kobayashi (202-326-3363) of the FTC's Bureau
of Economics.

BEFORE THE
FEDERAL COMMUNICATIONS COMMISSION
WASHINGTON, D. C. 20554
In The Ma tter of
Evaluation of the Syndication
and Financial Interest Rules
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)
)
)
MM Docket No. 90-162
Additional Comment of the Staff of
the Bureau of Economics
of the Federal Trade Commission l
I. 	In troduction
The staff of the Federal Trade Commission (FTC) appreciates this
opportunity to respond to the Federal Communication Commission's (FCC)
order requesting further comment on the financial interest and syndication
("fin-syn") rules. 2 The FCC is seeking comment on two proposals to modify the
fin-syn 	rules. 	Our comment addresses certain issues relating to economic
efficiency, competition, and the enforcement of the antitrust laws. It does not
discuss other policy considerations that may be relevant to the FCC.s
The staff previously filed a Comment and a Further Comment in this
proceeding. 	In our Comment, the staff concluded that a compelling economic
case did not exist for continuing to impose a per se ban on the acquisition of
certain ownership rights by television networks, that competition- would be
1 This comment represents the views of the staff of the Bureau of Economics
of the Federal Trade_Commission. 	They are not necessarily the views of the
Commission or any individual Commissioner. Inquiries regarding this comment
should be directed to Bruce H. Kobayashi (202-326-3363) of the FTC's Bureau
of Economics.
2 See Order Requesting Further Comment. In the Matter of the Evaluation of
the Syndication and Financial Interest Rules, MM Docket No. 90-162, issued
March 15, 1991.
S This comment is based on positive economic analysis and therefore does
not explicitly address normative concerns falling outside the scope of such an
analysis. 	These and other concerns not explicitly addressed in this comment
should be considered separately.
1

better served 	by 	removing the 	restrictions, and 	that 	instances of alleged
monopolization could be addressed through conventional application of the
antitrust laws." 	These conclusions were largely based 	upon an analytical
assessment of possible anticompetitive problems in the industry and the ability
of the fin-syn rules to address them. The staff also found no evidence that the
networks 	behaved 	anticompetitively 	prior 	to 	the 	enactment 	of 	the 	rules.
Furthermore, the staff found that subsequent changes in the market have made
anticompetitive behavior unlikely in the future.
In our Further Comment, staff examined two basic types of compromise
solutions 	that 	raise 	competition 	policy 	issues: 	(a) 	the 	regulation 	of 	the
negotiation 	process 	between 	the 	networks and 	the 	producers and 	(b) 	the
regulation of network ownership of financial interest and syndication rights. 5
Staff argued that regulating the negotiation process is unlikely to affect the
ultimate outcome of the negotiations. Thus, compelling reasons were not found
to adopt any of the proposed restrictions on the negotiation process. 	Further,
since 	the 	regulation 	of negotiations can 	potentially increase 	the 	costs of
bargaining and might cause mutually beneficial transactions to be bypassed,
adoption of these regulations may reduce efficiency. 	With respect to the
regulation of network ownership rights, the staff suggested that conventional
antitrust enforcement be used instead of specific regulatory limits. 	Thus,
compelling reasons also were not found to adopt regulations that would prohibit
or limit network ownership of syndication rights.
FTC staff have reviewed the FCC's latest proposals to reevaluate the
" See Comment of the Staff of the Bureau of Economics of the Federal Trade
Commission, In the Matter of the Syndication and Financial Interest Rules, MM
Docket No. 90-162, September 5, 1990 [hereafter Com men t).
6 See Further Comment of the Staff of the Bureau of Economics of the Federal
Trade Commission, In the Matter of the Syndication and Financial Interest
Rules, MM Docket No. 90-162, December 21, 1990 [hereafter Further Comment).
2

Commission's Financial Interest and Syndication Rules. Our evaluation suggests
that "Proposal Two" [hereafter Proposal II], which would substantially eliminate
the rules over a four year period and would make a presumption for repeal of
the rules at the end of this period, is largely consistent with the position FTC
staff have taken throughout these proceedings. 	Given that we have not seen
any evidence since these comments were written to change our conclusions, we
believe that adoption of Proposal II would most likely benefit consumers by
encouraging competition in the marketplace.
Proposal.I adopts many of the compromise options contained in the
FCC's Further Notice of Proposed Rulemaking,6 and contains several new
options. 	As noted in our Further Comment, "compromise may lead to a result
tha t is less desira ble than either complete elimina tion or complete reten tion of
the rules." 	We believe that Proposal I represents the kind of compromise that
might leave consumers worse off than if complete elimination or complete
retention of the rules were chosen.
Given the time limitations, and the fact that a detailed restatement of
the position we articulated earlier in this matter would not be useful, we limit
this comment to an examination of the sections of Proposal I that were not
specifically addressed in our earlier comments, and to a discussion of ways in
which this debate might be resolved empirically.
6 See Further Notice of Proposed Rulemaking In the Matter of the :Evaluation
of the Syndication and Financial Interest Rules, MM Docket No. 90-162, issued
October 22, 1990.
3

II. 	The Order (or Further Comment: Proposal I
A. 	An Overview o( Proposal I
Proposal 	I 	has 	several 	major 	elements. 	It 	would 	allow 	network
acquisition 	of financial 	interests in prime time programming only if 	the
network licensing term is limited to two years or less.7 It also would allow the
networks to syndicate in-house productions. 8 	However, in-house productions
would be limited. 	First, in-house programs would be defined to include only
foreign 	co-productions or 	programs 	wholly 	owned 	and 	controlled 	by 	the
networks. 9 Second, the percentage of a network's prime time schedule composed
of that netwo~k's in-house productions would be capped at 40%10 The proposal
also would place anti-warehousing and anti-favoritism restrictions on network
ownership of syndication rights.u 	In addition, domestic network syndication
of first-run programming would be prohibited.12 	Finally, Proposal I would
require that the networks collect and report specified data to the FCC. 1S All of
7 See the FCC's order, supra note 2, Proposal I, Section 2A.
8 [d .. Proposal I, Section 3.
9 [d .. Proposal I, Section 3A.
10 [d .. Proposal I, Section 3B.
11 [d .. Proposal I, Section 3C. 	Proposal II also contains anti-warehousing
and anti-favoritism regulations that would apply during the four-year phase
out period. 	See Proposal II, Section 2. 	However, the regulations contained in
Proposal II are not as strict as those contained in Proposal I. 	For example, the
anti-warehousing regulation contained in Proposal II would force a network
owned program to be made available within five years of the commencement
of the network run (Proposal I would require availability within four years).
And instead of strict percentage caps on network owned programs sold to
affiliates and network owned stations, Proposal II would require that non-
affiliates be offered these programs on terms no less favorable than those
offered to the affiliated and network owned stations.
12 [d .. Proposal I, Section 5.
IS [d .. Proposal I, Section 3C(3). Reporting requirements are also contained
in Proposal II. 	See Proposal II, Section 4.
4

the 	restrictions 	and 	rules 	would 	apply 	to 	"networks" 	defined 	as 	entities
"providing 14 or more hours per week of prime time entertainment on a regular
basis to interconnected ~.ffiliates that reach, in aggregate, at least 75 percent of
television households nationwide."14 	These restrictions and rules are discussed
individually below.
B. 	Limits on option periods to two years.
Proposal I would allow networks to purchase passive financial interests
in non-network produced programs if and only if the option clauses are limited
to two years or less. 15 That is, this option envisions a quid pro quo arrangement
under which a network can purchase financial interests only if it agrees to give
the producer a shorter option period. 16 This quid pro quo arrangement seems to
be designed to enhance the program producer's bargaining position. As we and
many others have noted before, a rule that limits a particular clause, yet leaves
the source of any network power unchanged, is unlikely to change markedly the
bargaining outcome. 17 	The same analysis we applied to bargaining under the
fin-syn rules applies to bargaining under imposed limits on option periods. 18
Any increased profits accruing to the producers from increased leverage after
14 Id .. Proposal I, Section 6, 7. 	Fox currently has 12 hours (four nights) of
prime time programming per week, so the definition would not currently apply
to them. However, the rules would apply to Fox if they expanded their network
schedule to five or more nights.
15 An option clause gives the acquiring network the exclusive right to
purchase, at a pre-specified price, a series for a specific number of years. 	See,
see Besen, Krattenmaker, Metzger, and Woodbury, Misregulating Television:
Network Dominance and the FCC, Chicago: University of Chicago Press (1984),
p. 104.
16 Limits on length of option clauses are not a part of the current fin-syn
rules. 	Limits on option clauses to no more than four years were imposed as
part of the Department of Justice consent decrees, and will expire in 1995. See,
e.g., 5 Trade Reg. Rep. CCH at 50,766 (1980) [ABC Decree). Thus, acceptance of
the two year option would cut in half the allowable length of the option clauses.
17 See. e.g .. Further Comment, supra note 5.
18 For an explicit analysis of this point, see Besen et al., supra note 15, p. 138.
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"I
the second season will be rationally anticipated by the networks and reflected
in lower network fees.
Nor is it clear that this quid pro quo arrangement will help to promote
competition or efficiency. We have said in our earlier comments that the major
pro-competitive economic function of allowing the networks to own financial
interests and syndication rights is to help align, contractually, the risks and
rewards that flow from program specific investments. 19 To the extent the fin-
syn rules reduce the networks' ability to capture competitive returns from
program specific investments, network financing of such investments may be
inefficiently reduced.. Relaxing the prohibition on network ownership of
financial interests can reduce this misalignment. 	However, it is not clear that
the two-year option will be used much in practice. 	A network can, under the
proposed rule, always choose to keep the status quo of having a four year option
period and no financial interests, and there is some indication that any gains
from holding a financial interest would not be worth the risk of losing a show
to another network after only two years. 20 If this is the standard case, then this
particular proposal for reform of the rules will be little used, have little
practical effect, and result in few efficiency gains.
In addition, it is not clear that substantial efficiency gains will be
realized even if the networks choose to accept a shorter option period in
exchange for financial interests. Because option clauses and financial interests
serve a similar economic function, (Le., they both allow the parties to a contract
to align the risks and rewards from up-front investments), a limit on the length
19 See Comment, supra note 4, pp 12-17. See also Besen et al., supra note 15,
p.137.
20 David Gerber, the CEO of MGM/UA Television, noted that the two year
option limit is "unheard of...1 don't think that the networks are going to try to
do a partnership with anybody if they take a chance of losing a show after two
years." See Kneale, "Networks Get FCC Reprieve on Rerun Rules," Wall Street
Journal, (March 14, 1991): B1.
6

,
of the option period may create the same type of inefficiency as the existing
rules create.21 Thus, although permitting a network to obtain financial interests
may lead to efficiency gains, tying this to a permissible option period that is
shorter than the parties would otherwise select may simply re-create many of
the inefficiencies that resulted from the rules.
c. 	Restrictions on network syndication of first-run programming.
Proposal 	I 	would 	prohibit 	network 	participation 	in 	the 	domestic
syndication 	of 	first-run 	programming. 	The 	current 	fin-syn 	debate 	has
concentrated on the potential exercise of market power by networks in the
market for "newly-produced off-network" programs. 22 	Consequently, we can
identify no competition policy basis for restricting the syndication of first-run
programming by a network. The record contains no claims or evidence that the
networks, individually or collectively, could exercise market power in the sale
of first-run syndicated programming. 	Further, our analysis suggests that such
a prohibition would likely be anticompetitive rather than procompetitive.
We argued in our Comment that it is unlikely that the networks would
be able to exercise market power in an antitrust market defined as all off-
network programs. 	Market power concerns are even less compelling when the
antitrust market is defined to be "first-run" syndicated programs because these
programs do not appear on the network prior to being syndicated. While some
proponents of keeping the current fin-syn rules have hypothesized that the
networks will attempt to use their control over access to the network to restrict
the supply of "off-network" syndicated programming,28 such access is not
21 See. e.g .. Besen et al .. supra note 15, pp. 104-105 and pp. 137-139.
22 For a discussion of this, see Comment, supra note 4, pp. 28-36.
28 Some proponents of retaining the current rules suggest that the networks
may monopolize the market for newer off-network syndicated programs by
conditioning a producer's access to the network on the (de facto) transfer of
rerun rights from the producer to the network. 	These rights could be explicit
transfers of syndication or control rights, or implicit transfers via incentive
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required for first-run programs sold to downstream purchasers (independent
television stations and cable networks). 	Thus, the networks do not appear to
possess the ability to restrict the supply of these programs, and the entry of the
networks 	into 	first 	run 	programming 	would 	not 	pose a 	direct 	threat 	to
downstream purchasers of first-run syndicated programming.
The entry of the networks into first-run programming also would not
appear to threaten competition in upstream production of first-run syndicated
programming. 	The fact that certain competitors might be harmed by some
action (in this case, entry by the networks) does not imply the action is
anticompetitive. 	Entry of competitors is likely to increase, not decrease,
competition in this, as in any other, market, and a rule that serves as a barrier
to entry is likely to protect competitors only at the expense of competition.24
D. 	Direct FCC Regulation of Programming
Proposal I contains limits on in-house production, and anti-favoritism
and anti-warehousing safeguards. 	All three of these issues were discussed
explicitly in the staff's Further Comment. 	We suggested that such regulations
would be unnecessary, ineffective, and counterproductive. 26 In lieu of restating
mechanisms. For a critique of these arguments, see Comment, supra note 4, pp.
22-35.
24 See Demsetz, "Barriers to Entry," American Economic Review 72 (March
1982): 47-56. 	The FCC has expressed concern that expanded network in-house
production might eviscerate the Prime Time Access Rule (PT AR). See Further
Notice of Proposed Rulemaking, supra note 6, Section VIII. 	However, a blanket
prohibition of network participation in the domestic syndication of first-run
programs would not be an appropriate response to this concern. 	This concern
might be remedied by extending the prohibitions of the PT AR to include
network-produced in-house programming, and Proposal I already contains such
a remedy. 	This remedy would ensure that the programs seen in the access
period are produced by others than the networks. 	However, as pointed out in
our earlier comments, this will not necessarily result in either a different or
higher quality set of programs. 	The networks will still have complete choice
over which programs they will broadcast, so that changing who produces a
program does not imply that what is broadcast will be substantially changed.
See Further Comment, supra note 5, p. 19.
26 See Further Comment, supra note 5, pp. 19-24.
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these arguments, we will comment on several issues that were not covered
explicitly in our earlier comments.
First, 	Proposal 	I 	contains 	a 	rule 	that 	creates 	a 	presumption 	of
"favoritism" when a network sells a show to more than 40% of its affiliate and
owned and operated television stations. Although such a rule would effectively
prevent a network from selling a particular show to more than 40% of its
affiliates and O&O's, it is not clear that such a rule would benefit consumers
or that the rule would increase efficiency. A network "favors" its affiliates by
supplying them with network programming and news presumably because to do
so is efficierit. 	Many of 	the same efficiencies from 	owning a 	national,
interconnected, and 	full-time system of program distribution 	would seem
readily to apply to the sale of "off-network" as well as "network" programming.
Preventing the networks from selling a show to more than 40% of its affiliates
may prevent the network from taking advantage of these efficiencies.26
Second, the strict (narrow) definition of "in-house programming" which
includes only those shows co-produced with foreign firms and shows wholly
owned and controlled by the networks may perpetuate the effect of the existing
rules. For example, domestic partnership deals between independent producers
and the networks would not be classified as in-house productions, and would
be 	subject 	to 	the 	rules 	as 	contemplated 	in 	Proposal 	I. 	Under 	these
circumstances, further network financing of an independent producer's deficits
would occur only if the independent producer either sells all ownership rights
to the network or convinces the network to take a two rather than a four year
option. 	Neither option is likely to be an attractive contract. 27
26 See Besen et al., supra note 15, pp. 132-133, and p. 155, Comment, supra
note 4, pp. 21-22, and Further Comment, supra note 5, p. 20-21.
27 According to the Wall Street Journal, the chief operating officer of MTM
enterprises said that the FCC plan would all but eliminate any chances of
negotiating partnership deals with the networks to get better financing to
produce series, forcing independent producers to deal only with HoHywood's
9

Third, the FCC might examine the effects of this rule on the Fox
network and other program producers considering .entering as a broadcast
network. 	The most effective (but not the only) way in which to diminish any
broadcast network's market power would be to induce other broadcast networks
to be formed. 	It would seem to be counterproductive to put in place a rule
which might force a recent entrant such as Fox to cut back its plans for
expanding its network schedule beyond four nights per week. 	It would seem
equally counterproductive to force Fox to divest either its network or its
syndication business. The observation of either outcome would send a negative
signal to any other program producers who might consider starting their own
networks. 28 	That is, the signal received by a program producer considering
integrating into network broadcasting might be that it either has to stay small
(and not be considered a network under the FCC rules) or be subject to forced
divestiture of its syndication business.29
Finally, the positions of the parties have, Quite correctly, been a focal
point during this debate. 	As we cautioned in our earlier comments, these
positions must be evaluated carefully. For example, the hypothesis that program
producers should support repeal of the rules if repeal would increase efficiency
does not necessarily hold once the networks' position as a purchaser and as a
potential alternative to the output supplied by the program producers is taken
major studios. 	See Kneale, supra note 20. 	See also the statement of David
Gerber, CEO of MGM/UA, supra note 20.
28 Broadcasting Magazine has reported that MCA and Paramount have
considered setting up a network. See "Making the Fifth: MCA and Paramount
Talk Network," Broadcasting (October 23, 1990): p. 35.
29 The rules would not apply to Fox if it maintains its current four-night
(12 hour) per week schedule. 	In addition, the rules have a grandfather clause,
which would not force Fox to divest ownership of programs it currently owns.
However, neither the grandfather clause nor the fact that the rules under
Proposal I would 	not apply currently to Fox will prevent the rules from
inefficiently deterring the future actions of Fox or other potential entrants.
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into account. so 	However, the fact that Proposal I 	has been criticized by
independent producers in addition to the networks raises serious questions about
the compromise contained in Proposal I, and raises the possibility that the
regulations contained in it may be worse than either complete retention or
complete repeal of the rules.
E. 	Reporting Requirements
Both Proposal I and Proposal II require the networks to collect data and
file reports with the FCC. Requiring the collection of data could prove useful
in resolving the underlying policy debate empirically, and so might be an
efficient requirement provided it is not overly burdensome.
The economic analyses presented during this debate point to several
potentially informative empirical projects. 	As pointed out in our earlier
comments, 	much 	of 	the 	discussion 	about 	the 	networks' 	ability 	to 	act 	as
monopolists in the sale of syndicated programs revolves around whether an
antitrust market for newly-produced off-network programs exists. For reasons
explained before, we think it unlikely.Sl Since the existence of such a market
is a 	necessary (but not sufficient) condition 	for 	the exercise of network
monopoly power, the absence of empirical support for such a narrow market
would weaken further any basis for retaining the rules.
Analysis of 	this 	question 	would 	generally 	require estimation of a
so See Comment, supra note 4, pp. 21-22 and p. 14, fn. 28. 	The general
principle put forth by those who support retention of the fin-syn rules is that
a firm owning a large broadcast medium cannot also freely own the programs
broadcast over it. 	We note that this argument would apply equally to the
relationship between a large cable multi-system operator and a large media
company owning pay program services broadcast on these systems, and that
efficiency is unlikely to be served by a per se rule interfering with broadcast
networks' ownership of the programs they broadcast and is equally unlikely to
be served by per se rules that prevent companies owning pay program services
from owning and operating cable systems.
SI See, e.g., Comment, supra note 4, pp. 23-27.
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..
"residual demand curve" facing the firms in the market.82 Unfortunately, such
a study would require more than network participation in the reporting process.
Among other things, the project woul4 require collection of a representative set
of contracts (including terms and prices from syndicators) for both off-network
and first-run syndicated program sales, as well as data on costs of distribution
and production of these shows.
We also note that the reporting requirements will be especially important
if Proposal II is adopted. 	The substantial elimination of the rules over a four
year period would result in a greater opportunity to examine empirically
network behavior in light of the various theories (e.g., warehousing, favoritism)
put forth by those favoring the rules.ss 	Such information would provide a
sound basis for the FCC decision either to relax substantially or to re-impose
the Rules. 	This opportunity would not be available if Proposal I, which
substantially perpetuates the effects of the current rules, is adopted.
82 See, e.g., Baker and Bresnahan, "Estimating the Demand Curve Facing a
Single Firm," Journal of Industrial Economics 33 (1985): 427, and Scheffman and
Spiller, "Geographic Market Definition Under the U. S. Department of Justice
Guidelines," Journal of Law & Economics 30 (April 1987): 123-148.
88 Empirical studies of the networks' behavior prior to adoption of the rules
do not support the imposition or continuation of the rules. 	See, e.g., Crandall,
"The Economic Effect of Television-Network Program 'Ownership'," Journal of
Law & Economics 14 (October 1971): 385-412; and "FCC Regulation, Monopsony,
and 	Network 	Television 	Program 	Costs," 	Bell 	Journal 	of 	Economics 	and
Management Science 3 (Autumn 1972): 483-508. See also Woodbury, Besen, and
Fournier, "The Determinants of Network Television Program Prices: Implicit
Contracts, Regulation, and Bargaining Power," Bell Journal of Economics 14
(Autumn 1983): 351-365.
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III. 	Conclusion
FTC staff continues to believe that the best course is to eliminate the
fin-syn rules. 	We believe that Proposal II substantially achieves this goal. 	We
also continue to believe that Proposal I represents the kind of compromise that
might 	leave consumers 	worse 	off 	than 	if either complete 	elimination or
complete retention of the current rules were chosen.
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