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Why the FCC Should Reject NAB’s FM Proposal

Read excerpts of iHeartMedia’s arguments to the commission about easing FM ownership rules

Big radio group owner iHeartMedia supports “targeted reform” of local radio ownership rules in the United States, including eliminating the limits on common ownership of AM stations or, at a minimum, removing AM subcaps. But the company told the FCC that it should reject an “exceedingly aggressive” proposal from the National Association of Broadcasters regarding limits on FM station ownership.

The following are excerpts about the latter from iHeart’s reply comments, filed in May as part of the commission’s quadrennial regulatory review. In sections preceding this excerpt, iHeart argued that the broadcast radio market is the relevant one for determining the need for modifying local radio ownership rules and that the FCC should reject the NAB’s “radical redefinition” of the relevant market. 

The Record, Taken as a Whole, Demonstrates That the NAB’s Overly Aggressive FM Local Radio Ownership Proposal Attempts to Address a Competition Problem Beyond the Relevant Market and Would Be Ineffective in Doing So

The NAB’s proposal to eliminate the local ownership limits on FM stations in all markets below the top 75 and permit common ownership of eight FM stations (up to 10 with Incubator-related waivers) in the top 75 markets is designed to address a competition problem in a market consisting of broadcast radio, non-broadcast audio services such as satellite radio, and digital media platforms such as Facebook and Google. It makes no pretense of attempting to remedy competition problems within the relevant broadcast radio market. … 

iHeart contends that the NAB’s prescription is not a solution for the competitive disparity between AM and FM stations, the only relevant market, but actually worsens that competition problem. Moreover, even assuming for the sake of argument that it might be proper to consider the broader audio ecosystem, there is a disconnect between the NAB’s solution that rests on cost efficiencies and economies of scale flowing from increasing the number of stations under common ownership in a market and what might be sufficient to enable broadcasters to meet the larger competitive challenge posed by digital media giants.

[NAB to FCC: Revise Ownership Rules to Support Radio]

Many commenters share iHeart’s view that the relevant market is broadcast radio and radio broadcasters simply do not compete in the same market as Internet-based platforms such as Facebook and Google. In its comments, NABOB quotes at length from an August 2, 2018, article by Eric Rhoads, a recognized expert in the radio and network radio business, owner, operator and programmer for 30 years, and chairman of Radio Ink: 

“The FCC is made up of very smart people who, hopefully, understand that giving more radio stations is not going to solve the Google, Facebook, Instagram, Snapchat problem. I dare say that ship has sailed and that radio’s ability to compete with the Internet isn’t going to be impacted one ounce by having more stations per owner. … The only similarity between Google/Facebook and radio is that we are all in the advertising business. That’s where it stops. Their approach to advertising is so utterly different that no one is going to spend more in radio because Company A or Company B has more stations.”

In its comments, the Multicultural Media, Telecom and Internet Council quotes at length from Ronald Gordon and Ed Cherry’s op-ed in the July 25, 2018, edition of Radio World: 

“How would buying an additional four or five stations in a market allow a broadcaster to take on Google or Facebook? Individually, these big tech companies dwarf the annual revenues of the entire radio industry combined. How exactly would gutting the radio ownership rules drive advertising money away from tech and into radio industry’s pocket? To the advertiser, what difference does it make who owns the station? Horizontal deregulation just shuffles the deck in favor of the big guys; it does nothing to improve radio’s ability to compete with big tech.”

[NAB Urges Forward Thinking for Ownership Reform]

Other broadcasters supportive of the NAB proposal make the same point as the NAB that non-broadcast audio and digital platforms compete for audiences and advertising revenue in a fragmented marketplace. They rely heavily on a study by Borrell Associates, “documenting the commanding position of digital advertising giants in today’s local advertising marketplace.” Like the NAB, they conflate the advertising market with the audio services market and even within the advertising market fail to differentiate among the different purposes and inherent capabilities of broadcast radio advertising and digital media advertising. … 

[B]roadcast radio focuses on the top of the advertising funnel, reflecting its strengths in reach and branding. In essence, this strength of broadcast radio reflects the fundamental nature of the medium; it distributes content on a one-to-many basis. Digital media, such as Facebook and Google, are sought by advertisers because they focus on the bottom end of the advertising funnel where the vast amount of individualized data they collect from users gives them direct and often instantaneous impact on a one-to-one basis with prospective purchasers. 

Moreover, digital platforms are the recipients of promotion from broadcast radio, further illustrating their complementary relationship. These fundamental differences between broadcast radio and digital media in advertising utility … are why broadcast radio and digital platforms are not substitutable even from an advertising perspective, much less from a holistic perspective.

[NAB Presses FCC to “Modernize” Radio Ownership Rules]

As so much of the focus of the NAB and its broadcaster supporters is on competition for advertising revenue, one would expect that its justification for lifting the ownership caps would address specifically how its proposal would strengthen broadcasters’ ability to recapture lost advertising revenue to digital competitors. 

Therefore, it is revealing that the BIA Study relied upon so heavily by the NAB to support its contention that radical reform of the ownership limits is necessary to compete for advertising revenue against Google and Facebook does not even attempt to quantify the purported impact of the changes it proposes on broadcast radio advertising revenue: “To err on the conservative side, however, we do not assume in our financial models below any increase in revenue per station resulting from the proposed combinations …”

Although the BIA Study characterizes its reluctance to assess the impact of increased common ownership as “conservative,” it also may be understood as an implicit admission that there is no evidentiary basis for concluding that lifting the ownership limits will enhance the broadcast radio industry’s ability to compete against digital platforms for advertising revenue. 

In fact, power ratio studies performed by iHeart provide further strong evidence that more stations in a cluster does not increase a radio broadcaster’s ability to attract additional advertising revenue in that market. Power ratios are an accepted industry measure of how a radio station is converting its ratings into advertising revenue. 

The power ratio is calculated by dividing a station’s share of the total ad revenue in a market by the station’s overall audience share. The higher the power ratio, the better the station is performing against expectations based upon audience share. For example, a power ratio of 1.0 would indicate that a station is performing consistent with expectations, whereas a station with a power ratio of 0.75 would be underperforming.

[iHeart to FCC on Local Ownership Rules: Do No Harm]

iHeart examined stations it licenses in 29 markets where common ownership of five FM stations is allowed under current law, compared to 25 markets where only four FM stations under common ownership is allowed. In the 29 markets where iHeart licenses five FM stations, the average power ratio decline between the top performing FM station and the least performing FM station was approximately 57%. However, that same measurement in markets where iHeart owns only four FM stations yielded a decline of only 42%. Marketwide, the results suggest a better average power ratio performance where iHeart licenses four stations as opposed to five. In fact, the markets in which iHeart licenses five FM stations exhibited a 0.15 comparative power ratio dilution compared to those markets where only four FM stations are licensed. 

This power ratio study is compelling evidence that adding a sixth, seventh or eighth FM station to a cluster in a top 75 market, as NAB proposes, will do little to nothing to enable radio broadcasters to compete more effectively for advertising dollars. This confirms the long-held view that station rank within a market and pricing are the dominant factors in attracting local advertising dollars, and demonstrates the disconnect between the remedy advocated by the NAB and the competition problem, albeit not in the relevant market, that it seeks to ameliorate. 

Having failed to link its proposed remedy directly to enhanced ability to attract advertising dollars, the NAB falls back on the contention that allowing more consolidation will create cost efficiencies and economies of scale that will free up more resources to compete with non-broadcast media and digital platforms. Yet, even here the BIA Study upon which the NAB relies suffers from obvious inadequacies. 

[19 Ways to Make the FCC Rules Better]

For example, it fails to consider the costs necessarily incurred in the acquisition of new stations and their integration into existing operations. Based on its extensive experience, iHeart is very familiar with such expenses, including legal fees, due diligence and financing. Such costs also could include new construction or expansion of facilities, additional management personnel, and relocation and moving expenses. Such omissions from the net impact of consolidation are equivalent to a balance sheet showing only assets and no liabilities. They overstate the net benefits of the efficiencies and economies of scale that would flow from increasing the limits on FM stations or eliminating them altogether.

The BIA Study examines the extent to which AM stations are at a significant, indeed, distressing competitive disadvantage relative to FM stations. Its conclusions mirror those reached by iHeart. The BIA Study also recognizes that FM stations constrained by the current local radio ownership rules are far more numerous than AM stations and therefore the effect of eliminating or significantly relaxing those rules likely will be disproportionately felt in the FM band. However, the BIA Study fails to analyze the differential ramifications of that outcome. Had it done so, it should have concluded, as has iHeart and other commenters, most notably Salem Media Group and Crawford Broadcasting Company, that the NAB’s proposal regarding FM stations would lead to a further weakening of the AM band and the possibility of mass migration from AM to FM. 

Adoption of the Overly Aggressive NAB Proposal for FM Stations Would Harm Competition in the Relevant Broadcast Radio Market and Would Not Be in the Public Interest

Many commenters express profound concern about the negative effect of adoption of the NAB proposal on the public interest. A subset of these commenters join iHeart in focusing on the harm to AM radio stations and the consequent harm to competition in the broadcast radio market, localism and diversity were the NAB proposal on FM station ownership reform accepted by the commission.

Salem Media Group, the nation’s largest religious broadcast radio group, opposes any deregulation of local radio ownership limits. Its rationale focuses squarely on the likely harmful impact on AM stations: 

“Salem believes that a devaluation of the AM band could result if the commission were to deregulate subcap limits. This is because the possible resulting migration of leading radio brands to the FM band could accelerate a departure of the AM audience. Moreover, because the AM signal is far more amenable to wide area coverage, a policy decision that encourages station owners to consolidate their holdings in the FM band could leave many listeners disenfranchised, potentially eradicate certain formats, and increase risk in times of crisis.” 

Salem’s comments delve into multiple major markets where sharp shifts in audience listening away from leading AM stations to sister FM stations have occurred. Salem describes the implications: 

“If the AM band continues to be a ‘less traveled’ destination for listeners, diminishment would certainly result for popular AM brands. Should this occur, the AM band, instead of being a treasury of quality news and religious talk, sports and ethnic programming, will lose its audience appeal. The final result could be an asset devaluation of companies with sizeable AM radio station ownership.” 

[NAB Argues for “Economies of Scale”]

Crawford Broadcasting Company articulates the same deep concern about the ramifications of removal of the FM subcaps on AM stations. Crawford observes that

“[I]t is only the existing subcaps holding some licensees back from acquiring many more FM signals. We have no doubt that if the subcaps are removed, existing independently-owned FM stations will in short order be sold to larger groups that will move lucrative talk formats from existing AM outlets to those FM stations.” 

Crawford then describes the foreseeable, indeed, probable consequences: 

“The result will be much to the detriment of AM radio. With a drop in demand and an increase in supply, the value of AM stations will significantly drop, in many cases to less than the value of the land on which their antenna sites are built. That will in turn lead to stations going dark. In short, we believe that removal or easing of FM subcaps will do far more harm to AM radio than all the good the commission has so far achieved in its AM revitalization efforts. This will be a tremendous loss, one that could well start the short countdown to the end of AM radio as a viable medium.” 

In reply comments, Crawford reiterates these concerns, explicitly agreeing with iHeart about the risk of harm to AM radio that likely would result from adoption of the NAB proposal regarding ownership limits on FM stations. 

[Associations Tell FCC Its Numbers Are Messed Up]

The MMTC also embraced the views of iHeart regarding the potentially devastating impact that adoption of the NAB’s proposal regarding FM ownership could have on AM stations. Quoting from the writings of African American broadcaster, Glenn Cherry, and Latino broadcaster, Ronald Gordon, the MMTC explained that greater FM common ownership would eviscerate “AM station asset value and marketability, and even repair-ability.” 

In sum, there is abundant support in the record of this proceeding for the position expressed at length in iHeart’s comments that the risk of harm to AM radio and all of its public interest benefits, specifically advancing localism, diversity and national security, militate against adoption of the NAB’s overly aggressive proposal regarding FM ownership limits.

Read iHeartMedia’s full filing at Comment on this or any story. Email [email protected].