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A qualified entity entitled to take advantage of the 18 month extension is a one who would qualify as a small business under the rules of the Small Business Administration.  Essentially, for a radio broadcaster, a small business is one with revenues of less than $6.5 million in the year prior to the sale.

This rule provides small businesses the opportunity to acquire rights to construct a new station at potentially firesale prices - as in many cases they may be the only ones who can get sufficient time to construct a station.  But parties wanting to take advantage of this rule need to be sure that they leave time to get the FCC approval in a timely fashion, so that the permit doesn't expire before the extension has the opportunity to kick in. 

One of the specific proposals of the Obama campaign is the promise to appoint a Chief Technology Officer as a cabinet-level position to help coordinate policy across the many government agencies that deal with technology and communications.  This position would be designed to develop policies that will enhance the competitive position of the United States in the world-wide technology revolution.  Clearly, such a position will create a new executive-level focus on communications policy that will affect the workings of the FCC.  How will this focus impact broadcasters?  With the unanimous bipartisan decision of the FCC on Election Day approving the use of unlicensed devices in the television band, the so-called "white spaces" decision, one might have a glimpse of the kinds of regulatory actions that could be expected from an Obama FCC (though hopefully not an example of the procedures for making that decision).  No longer will the traditional media or established communications companies be favored if there is the potential for some sort of transformative technology that can increase US technological competitiveness.

But the hope for an Obama administration is that the rhetoric of a transformative candidacy, one geared toward uniting the various divides of the country, will seep into the broader workings of the administrative agencies in Washington - that the pitched battles of one industry versus another, or one partisan viewpoint over another, will be replaced by a more cooperative spirit that will move the country, and specific industries forward.  One would hope that this spirit would encourage compromise, and would bring a new openness to government that will allow real discussion to take place on issues, rather than decisions being made based on agendas that are set in stone before the evidence is in and the arguments made.   One would hope that some of the unyielding positions that some regulators have taken on communications policy issues would be more open to persuasion and discussion.

To be more specific, one would hope that an Obama administration would, in the broadcast regulatory arena, be open to recognizing that we have a pretty incredible broadcast service in this country - one that can rapidly adapt to disasters, and can bend and shape itself to the needs and desires of the audience.  While there have been excesses in broadcasting here and there, these tend to be self-correcting, as witnessed by the recent divestitures of many radio and television stations by big groups - helping to bring back some of the localism lost by the industry's rapid consolidation in the early part of this decade. 

Some have feared that the return of a Democratic FCC will result in the return of the kinds of nitty-gritty broadcast regulation that has seemingly been advocated by some quarters of the Democratic party - a return of the Fairness Doctrine, the kinds of detailed programming disclosure requirements that have been adopted but not yet implemented for television broadcasters that impose great costs without any discernible regulatory benefit (see our post here), or the adoption of other specific regulations that increase government mandates without corresponding benefits.

But I am hopeful that an Obama administration would not be one to adopt unproductive regulation.  Clearly, the Obama administration will be one that will want to stress inclusiveness and opportunity for all in the media, and will look for ways to encourage minorities and other new entrants into broadcast ownership.  But if we look at the recent localism proceedings, for instance, we see that many members of the minority community have actually opposed the kinds of specific regulatory obligations that some have attributed to the Democratic Commissioners, as minority broadcasters and other new entrants realize that they need to make a living operating a station - that broadcasting is a business that must generate a profit.  And that specific and detailed regulation take flexibility and innovation away from broadcasters, and usually impact small broadcasters more than large conglomerates.  So an administration that wants to encourage new owners can't engage in a wholesale re-regulation of the broadcast industry.

Do I expect some more regulation?  Of course - but that seems to be a reaction to the current climate for all industries in Washington where there seems to be building a general consensus that that the philosophy of deregulation may have gone too far (see our post here).  But I would look for regulation around the edges, regulation that imposes some public interest obligations on broadcasters but ones that can be lived with - not ones that are imposed simply for the sake of regulation and which can impose a crushing burden on small business. 

From the rumors swirling around DC of the names of potential Chairs of the FCC in the new administration, many have worked at past Democratic Commissions, but many of these have spent time in the business community since leaving the FCC, and are thus familiar with meeting a payroll and the costs of regulation.   I believe that right now, we should keep hope alive and look at the Obama administration as one that may bring a new emphasis to the communications world while not unduly burdening those that are already operating in that world.  It is a new day - let's hope that it is indeed a brighter one for broadcasters.

Another set of comments submitted by a group which includes a number of consulting engineers went even further, suggesting that all of Channels 5 and 6 be turned over to a radio service, that the service be operated in a digital mode, and that AM stations and LPFMs all be moved to these new channels.  The proposal is quite detailed, submitting a table of allotments for the relocation of the AM stations.  The proposal also sets out alternative channels for all current full-power television stations on Channels 5 and 6 where they could be moved to clear these two channels for radio operations.

On the other hand, a number of groups have opposed use of these channels for radio.  The opposition includes those stations who already are operating their digital stations on these channels, and organizations including the NAB and MSTV who represent broadcast television stations.  These groups argue that these two channels need to be retained as television channels not only for use by the television stations that have digital operations there, but also for new stations that can be allotted after the end of the digital transition, as well as for LPTV stations that are already operating there and ones that could be built in the future. 

Thus, the Commission will be faced with a choice between using these channels for more radio or more television.  So far, no party has argued that there is no need for this additional service given the multiple services that each TV and FM radio station can provide when operating digitally, nor have questions been raised as to what the addition of new channels (either radio or TV) will do for revenues of existing stations already facing unprecedented competition from other forms of new media.  Of course, the competition will come digitally in any event through other means of wireless delivery, so more competition is inevitable whether or not these channels are used for new broadcast services.  The use of these channels for more broadcasting will only hasten the inevitable increase in competition that broadcasters will face.   At the same time, the addition of all these channels will show, once again, that the incredible competition that exists to broadcasters and demonstrate that government regulation is not necessary to ensure that local service will be provided as, if the marketplace demands it, it will be provided (see our post here). 

Reply Comments on these important issues are due on August 29.

Alternatively, certain parties suggested that the current Designated Entity ("DE") status is too broad, as it could include all sorts of new, small businesses, even including some that are backed by wealthy individuals who do not need government assistance. Thus, if race-based classifications are not acceptable, these groups suggest that the Commission confer DE status only on those groups that demonstrate to the Commission, through a “full file” review, that they are socially and economically disadvantaged. This would be similar to some programs established by university admissions offices to avoid race-based classifications, but still admit minorities and members of other socially disadvantaged groups who might otherwise be overlooked in an admissions process. The Commission asks the proponents of these rules to explain what criteria the FCC would use to determine who is socially and economically disadvantaged, and whether the adoption of such a standard would require a unique review of every applicant who comes before the FCC seeking such status, or if there are objective criteria that could be used to make review easier.

FCC Form 323 Revisions.  To gather information about minority ownership, the Commission is also asking if it should revise some of the processes it uses to collect ownership information, particularly ownership information about broadcast ownership by minorities and women. This information is gathered currently on a station's Ownership Report, submitted every two years on FCC Form 323 (or more often if there has been a transfer of ownership).  Rather than filing ownership reports every two years on the anniversary date of a station’s renewal filing, the Commission asks if it should create a single, uniform date for the filing of FCC Form 323 ownership reports by all broadcast stations. The Commission also asks if it should require the filing of reports by stations owned by individuals and partnerships owned entirely by individuals (which are currently exempt from the requirement to file updated Ownership Reports every two years, as the Commission considers any ownership changes in these entities to require the filing of a transfer form, at a minimum a short-form Form 316 pro-forma transfer of control as, under the common law, any change in the partners of a general partnership represented the creation of a new partnership). Also, to insure that ownership information is correct, the FCC asks if it should conduct random audits of the Form 323 reports that are submitted.

Proposals For Changes in FCC Technical Rules to Increase Broadcast Opportunity.  The Commission also advanced certain suggestions to make available more broadcast stations for DEs to acquire. These include the following proposals:

• Allowing FM licensees who are multicasting in digital to actually sell one of the multicast channels to a DE, which would be given a separate license for that station, which could itself be sold in the future, separate from the main station with which it is associated. 
• Allowing AM licensees who operate an Expanded Band AM station (operating on 1610-1700 on the AM band) to keep both the expanded band AM and their original AM station in the traditional AM band if they are a Small Business, or to sell one of the stations to a DE within a year. Most of these stations were supposed to turn in one of these licenses at some point within the last few years (within 5 years of the commencement of operation by the Expanded band station), but many have been permitted to retain the stations on a temporary basis while this proposal, first advanced two years ago, makes its way through the Commission.
• Reassigning TV channels 6, and possibly 5, for use for new FM stations after the digital television transition. Channel 6, which is immediately adjacent to the FM band, has been kept pretty much vacant under the DTV allocation table, to eliminate interference to FM noncommercial stations which sometimes occurs under current rules. We previously wrote about this proposal, here.
• Allowing the change in city of license of a radio station to any other community within the same radio market (presumably to allow for better coverage of population centers) even if the move would leave the current community without any full-power radio service, if the applicant agrees to finance the construction of a low power FM station in the community that is being abandoned.
• Proving must-carry status to Class A TV stations (presumably enhancing their economic viability). Class A TV stations are LPTV stations that were specially designated as Class A stations in a one-time window in the late 1990s, if they could show that they were originating local television programming and otherwise met all rules applicable to full-power stations (e.g. main studio, public file, children’s television rules). Such stations are given protected status from being bumped off the air by new full-power TV stations or increases in the facilities of existing stations.

Incubator Program.  In addition to these proposals, the Commission asked for comments on a proposal to create a trail “incubator program": by which a large broadcaster could receive an exemption from the radio multiple ownership rules so that it could have one more station in a market than would be otherwise permitted if it “incubated” the ownership of another radio station in the same market by providing financing or other assistance to the incubated station.

Proposals to Review Broadcast Transactions for Effect on Minority Ownership.  Finally, the FCC asked for comments on proposals that the Commission be able to evaluate any broadcast transaction for its potential effect on minority ownership, to deny temporary multiple ownership waivers in large broadcast transactions which would create temporary ownership holdings in excess of the ownership rules, and to allow minority owners to exceed ownership caps in any market if necessary for those owners to have holdings equal to those of the largest owner in a market (which might have grandfathered holdings).

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These proposals include ones that could create opportunities for many broadcasters and for many individuals who are interested in entering the broadcasting industry through the construction of new stations or the acquisition of existing stations.  There are, however, potential issues for some broadcasters, particularly in connection with the final proposal to review broadcast transactions for their effect on minority ownership, which could slow the processing of some transactions.  Broadcasters should review the entirety of the proposals made by the FCC, and file comments on those issues that most directly affect them. 

The specific proposals that were adopted, and which will go into effect 30 days after Federal Register publication, include:

• Allowing designated entities to purchase construction permits for new stations that are nearing their expiration dates, and giving the designated entity 18 months after the purchase in which to construct the new stations.
• Modified the Equity Debt Plus rule (which makes an otherwise non-attributable ownership in a broadcast station interest attributable if the interest exceeds 33% of the financial interest - debt plus equity - in the company and either (a) the holder has an attributable ownership interest in another station in the same market, or (b) it provides more than 15% of the programming to a station) to allow that holder to have a financial interest in a designated entity if (i) the interest is less than 50%, or (ii) the financial interest is less than 80% and the holder of the interest has no equity interest, option, agreement, or understanding by which it can acquire an equity interest in the designated entity
• Revived the FCC's distress sale policy by allowing a broadcaster whose license has been set for a revocation hearing or is facing a renewal challenge on basic qualifications grounds to sell to a designated entity to avoid the issues that it is facing.  Ordinarily, if a licensee is facing issues which could lead to a loss of license, it is not allowed to sell the station until the issues are resolved.
• Allowed the sale of existing grandfathered combinations of radio stations which exceed the limits established by the multiple ownership rules (as revised in 2003) to one owner, provided that the owner agrees to sell the stations which exceed the limits to a designated entity within a year
• Provided additional time for spin-offs of broadcast stations in "substantial transactions" if efforts were being made to sell excess stations to designated entities
• Gave a preference to companies which "incubated" companies owned by designated entities (i.e. provided them financing or other similar assistance) if the company was in a situation where the company and another both filed, on the same day, to create a TV duopoly in a market where only one such duopoly could exist (i.e because there must be 8 separately owned and controlled television operators remaining in a market after the permitted combination).
• Adopted a new rule prohibiting discrimination in the sale of a commercial broadcast station on the base of race, sex, religion or national origin.  A certification that no discrimination has taken place will be required in applications submitted to the FCC for approval of station sales.
• Adopted a zero tolerance policy against "ownership fraud," situations where the putative owner of a station is not truly involved in station operations.  The FCC promises to try to resolve any such allegations within 90 days, and also promised to keep confidential, to the extent that it can consistent with the Freedom of Information Act, the names of whistleblowers on such frauds
• Adopted a rule prohibiting any advertising contract containing "no urban" or "no Spanish" dictates, meaning that an advertiser cannot specify in an advertising contract that the ads will not run on stations targeted to the African-American or Hispanic communities.  A certification that no such advertising discrimination has taken place will be required in license renewal applications.
• Agreed to conduct a number of initiatives to promote minority ownership, including conducting a study of the extent of minority and female ownership in broadcasting (and amending the FCC Form 323 Ownership Report to obtain such information), encouraging local banks to lend to the broadcast industry, holding an access to capital summit, and publishing a guidebook on diversity in contracting and ownership.

While some of these initiatives seem to have real promise for designated entities (e.g the sale of expiring construction permits for new stations and the distress sale policy expansion), others seem to be less likely to be used.  Just how often will two television operators file an application to create a duopoly on the same day in a market with just 9 independent television voices?  I don't know that it has ever occurred, and doubt that it will be likely enough to occur in the future to provide much incentive for companies to enter into incubation agreements.

Several other proposals really need more details to avoid being a trap for the unwary, getting broadcasters into trouble for routine practices.  For instance, the Commission does not explain how this would they will insure that there is no discrimination in the sale of a broadcast station, or exactly what circumstances they would consider to be discriminatory.  For instance, to what extent must a seller go to make sure that the station is offered to minority and female prospective purchasers?  If there is a direct sale from one non-minority to another without any advertisement of the availability of the station, has there been some sort of discrimination?  Or if there is a sale of a religious commercial radio station to another person of the same religious affiliation, has there been discrimination?  The Commission does not address these questions. "Ownership fraud" is also curiously undefined.  What will happen to an entity that is found to have engaged in such fraud?  How can the FCC fulfill its promise to resolve allegations of fraud within 90 days - a very quick resolution for what can be a very complex issue?  These questions are unanswered.

Perhaps most surprising is the limited discussion of the prohibition on no urban-no Spanish dictates, as press reports had indicated that members of the advertising community had been visiting the Commission, lobbying on the issue.  But the Commission says nothing more than that there is a prohibition on these clauses in advertising contracts.  But if a broadcast company owns two stations - one a Spanish language station and the other an Adult Contemporary station broadcasting in English, if an advertiser says "run my ads only on the AC station", does that violate the prohibition?  If so, that might actually encourage some groups to avoid programming Spanish and urban formatted stations, to avoid having advertisers specify that their advertising run on only one or two other stations, and perhaps creating an issue even if the advertiser was just trying to reach the unique demographic served by that particular station.

Apparently, these issues will be sorted out through cases or future FCC pronouncements.  But, for now, broadcasters will have to guess what they mean. 

About the only new information found in the text dealing with the newspaper-television cross interest decision  was the details of several waivers granted by the Commission allowing the permanent continuation of certain existing combinations of newspapers and television stations.  The majority decision emphasized several factors favoring those waiver grants, including the economies recognized by these combinations, the increased public service that these economies permitted, and the business stability promoted by the permanent waivers.  This decision prompted significant objections from the Democratic Commissioners arguing that many of the owners who had been granted waivers had entered into the cross-ownership situation knowing that the combinations were not permitted by the rules in effect at the time, so that looking at business stability was rewarding these owners for making a decision that they knew was contrary to the FCC rules (the Commission could not block the purchase of a newspaper by a broadcast station owner, but could later refuse to grant a television station a license renewal if their owners had acquired a newspaper).  The Democrats argued that the standards used to permit these waivers would permit almost any waiver - reinforcing their position that the standards written into the rules would allow far too many combinations to go forward.

The Commission did, however, hold off on grants of certain newspaper-television combinations where the combinations involved more than one newspaper or television station in the same market.  In those cases, the Commission stated that it would hold additional proceedings to determine if these existing combinations should be permitted to continue.  With these waiver decisions, and the Democratic opposition, public interest groups have already indicated that they will appeal the Commission's relaxation for the ownership rules.

What has drawn less attention and, so far, less protest, are the ownership rules that the Commission did not relax.  On the issue of TV duopoly, the Commission was facing a remand from the US Court of Appeals, which had questioned the FCC rules limiting local ownership combinations of television stations to situations where there would be eight separate TV owners in a market after the combination, and prohibited combinations of any of the top 4 stations in a market.   The text of the decision, rather than relying on well-developed analysis of detailed economic showings submitted by the parties (as was done in the analysis of the newspaper-television analysis), the Commission cited some anecdotal evidence submitted by a few parties, and came to the conclusion that it would not change it rules.  No significant analysis is given to arguments that in smaller television markets, to have a viable fourth station, a combination is necessary.

On the TV duopoly issue, there was at least some discussion and analysis.  Radio received even less consideration.  The Third Circuit, in remanding the Commission's 2003 decision, asked the Commission to determine whether its numerical limits on the number of AM and FM stations that one party could own made sense - especially as stations have different coverage areas and different size audiences.  Should all of the stations count the same?  The Commission read the court's question at its most narrow - whether the Commission should allow more AM stations to be co-owned than allowed by the current limits.  The Commission concluded that some AM stations still are successful (again based on a few examples of AM stations that are still rated well rather than an extensive economic analysis of the AM radio segment of the industry), and concluded that the cap on AM ownership should not be relaxed.

The question asked by the Court could be read in a much broader context, that the Commission should consider the relative power and reach of stations before determining how much they should count in any multiple ownership analysis.  At least one party raised exactly that issue - whether a small Class A FM stations should count the same in a multiple ownership analysis as a large Class C FM station.  One example was posed where two Class A stations that are simulcasting in order to cover a geographically large market.  Should those two stations really count twice as much toward a licensee's ownership limits as a Class C station that totally encompasses the area served by the two Class A stations?  The Commission chose not to address that issue, concluding only that the rules that it had adopted had not been specifically overturned by the Court, so there was no reason to revisit them now.

Similarly, several parties asked for reconsideration of other aspects of the radio rules, including the rules dealing with grandfathering of ownership situations that did not comply with the rules adopted in 2003.  The Commission indicated that some grandfathering provisions would be dealt with in the Diversity order decided on at the December 18 meeting (though the full text of what was decided still has not been released).  Other clarifications or requests for reconsideration - including proposals for grandfathering of existing Joint Sales Agreements (or simply reconsidering the decision to make joint sales agreements attributable) were denied, basically with no reason except that the rules were adopted in 2003, not overturned by the Court, and therefore the FCC decided not to revisit the issue now.  As the Commission obviously decided to reconsider some aspects of the 2003 decision (e.g the grandfathering provisions considered in the diversity proceeding), how they can ignore other issues simply based on the fact that the Commission once decided the issue?  The purpose of reconsideration is to give the Commission an opportunity to revisit and review a decision that it made earlier, to consider points not examined or potentially decided incorrectly when the initial decision was made.  To refuse to even address the substance of the issues raised on reconsideration seems to defeat that purpose.

In short, with the issues that were decided, and those that were not, its likely that we have not heard the last of the ownership debate.  Court appeals are probable, and legislative intervention is even possible (Senator Dorgan has reportedly promised to introduce a resolution to overturn the decision).  So keep watching this space.

The FCC was also planning to consider at its December 18 meeting the commencement of a new proceeding to inquire as to whether it should adopt new rules or policies for embedded advertising - advertising that is incorporated into broadcast programming rather being than placed into a stand-alone commercial.  That order was removed from the FCC's agenda at the last moment, but will no doubt reappear at some point during 2008.  Together with other issues dealing with sponsorship identification in video news releases (see our description of a recent enforcement action here) and in connection with payola allegations, the Commission will be exploring whether broadcasters are trying to persuade their audiences to take action without giving the audience sufficient warning that they are being persuaded. 

All of these issues will be addressed in coming months - so advertising practices may well have to be modified to respond to Washington dictates in the new year.