Commentary: Media Mergers: The Danger Remains

Despite 100 channels and the Web, softer ownership rules will put the major outlets in Big Media's hands

Miami TV viewers are learning a lot about how Big Media operates just by watching local sports anchor Jim Berry. Berry appears on the 10 o'clock news on local UPN affiliate WBFS. Then, instead of calling it a night, he scurries across the building to do another newscast on WFOR's CBS 4 News at 11.

Miami sees a lot of Berry because his boss, media giant Viacom Inc. (VIA ), owns both stations and operates them from the same facility. When the two stations came under one umbrella after Viacom's merger with CBS Television Network in 2000, the UPN affiliate didn't have a news show. Now, with help from WFOR, it has launched a program at half the cost of starting one from scratch. For Viacom, owning two stations in Miami and a third in West Palm Beach allows it to produce more programming at lower cost to win viewers.

Five years ago, Viacom couldn't have two stations in one market. But in 1999, the Federal Communications Commission relaxed the rules barring such combinations. And now, a gale force is gathering to blow apart a wall of similar restrictions across the media that have limited the reach of broadcast, cable, and newspaper companies. In case after case, the U.S. Court of Appeals in Washington has thrown out long-standing rules or sent them back to the FCC with stern instructions for revision.

The court's deregulatory tilt is a big boost to FCC Chairman Michael K. Powell, who is enthusiastically taking up the charge. He is eager to challenge limits on both the size of broadcast and cable companies and the ability of separate industries, such as broadcast and cable, to merge. His rationale: The explosion of new forms of media, such as cable and the Internet, makes the rules obsolete. Nobody "is going to admit the media space in 2002 looks like it did in the 1960s and 1970s," says Powell.

If the FCC relaxes or axes the rules as early as next year, regulators could unleash a massive consolidation, resulting in "a tectonic shift in the landscape," says New York media consultant Peter A. Kreisky. The $40 billion AOL Time Warner, for example, conceivably could own its existing CNN and HBO cable channels and Time Warner cable systems even as it snaps up the NBC network and its local TV affiliates--and a few newspapers if it wanted. That's a nightmare scenario to a lot of consumers, already worried about the growing power of big media conglomerates to snuff out independent viewpoints and charge exorbitant prices for basic services. "This is as big a change as they come," says Blair Levin, an analyst at Legg Mason Wood Walker Inc. "The government has always imposed antagonism between media, but that is coming to an end."

Certainly, if the industry's economics have changed, companies should be permitted to join forces to survive and compete. And there's no denying that digital cable and satellite broadcasters can now offer hundreds of channels, and that cyberspace is a vast expanse able to carry a rainbow of views. But Chairman Powell and his fellow regulators shouldn't get too carried away with this argument. In a deregulated world, if a big, deep-pocketed company can own most--or even all--of the mass-market outlets in a community, what good is an infinity of obscure Web sites and cable channels in the face of such market power? After all, most people get their news and views from a handful of TV channels that can afford to blitz viewers with ads for yet more of their own fare.

Media executives insist they need to consolidate to compete, and they, too, argue that the emergence of new media over the past two decades renders the current FCC limits outmoded. "The idea that there's a scarcity of voices out there just doesn't fly anymore, if it ever did," says J. Stewart Bryan III, CEO of Richmond-based Media General, which owns 26 local TV stations and 25 daily newspapers.

But without restraints, media companies will naturally seek the largest audience and advertising base possible. As caps go by the wayside, media companies will be combining right and left. Among experts' predictions: Walt Disney Co. (DIS ), parent of the ABC Network, will try to gobble up ABC affiliates from the patchwork of companies that owns many of them, including Hearst-Argyle, E.W. Scripps, and The McGraw-Hill Companies (owner of BusinessWeek).

And newspaper companies like Media General will covet more broadcast stations in the cities where they publish. Newspapers lust after TV stations to recapture the readers and ads they have been losing to the airwaves for the past two decades. Already, due to a regulatory exception, Media General owns the Tampa Tribune, the city's top TV station, WFLA, and the city's leading Web site, Tampa Bay Online. Last year, it raked in $6.4 million in new ad revenues by selling advertisers multimedia packages. Other newspaper companies will want to try to replicate that success.

The broadcast networks, too, want desperately to own more TV stations. Local TV stations generated a hefty 39% cash flow margin in 2000, on average, according to media merchant bank Veronis Suhler Stevenson & Associates. At the same time, the big three networks have lost more than half their viewers and a quarter of their advertising to cable over the past decade. ABC, with affiliates covering only 24% of the nation's TV audience, will do the most aggressive shopping, but the other networks and station groups will surely spend big, as well.

As for cable, the courts seem to agree with companies that the current rule limiting them to 30% of the nation's pay-TV viewers is too tight. The cap was meant to ensure that big cable operators wouldn't squeeze out independent programmers with in-house shows. But the courts figure that when digital cable can boast hundreds of channels, that's less of a danger. So Comcast Corp. (CMCSA ) was able to buy the No. 1 cable operator, AT&T Broadband. Smaller players such as Cox Communications Inc. (COX ) and Charter Communications Inc. (CHTR ) will also want to bulk up.

As media companies start jockeying for position, the FCC will have its work cut out for it. The agency will have to examine cities like Miami, where Viacom's duopoly enabled it to add the new UPN news show to the market. But since it uses the CBS staff and the network's deep pockets to help produce it, does it really offer a different voice to the local mix? And regulators will have to consider the growing chorus of critics who say that as fewer and bigger companies dominate TV, radio, and newspapers around the country, other smaller outlets don't stand a chance against their clout. The increased diversity theory "is a straw man," charges media consultant Larry Irving, a former Clinton Administration official.

Meanwhile, media consolidation is well under way, even without massive deregulation: In 2001, 311 deals valued at $113 billion were announced, the highest amount for any industry. Scale is the name of the game. Already, the big three networks are aligned with conglomerates led by

Disney, Viacom, and General Electric. The AOL Time Warner (AOL ) merger only raised the stakes for bigness. If the FCC's rules evaporate altogether, "we would be trading some greater profitability...in return for undercutting the very pillars of separate media ownership that our democracy is built on," says Gene Kimmelman, co-director of Consumers Union.

It's up to regulators to decide whether more consolidation will hurt the range of viewpoints available to the public. But they need to tread carefully. Once gone, an independent press and media won't be easily recreated.

By Catherine Yang

With Tom Lowry in New York and Ronald Grover in Los Angeles

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