At its meeting last week, the FCC adopted a Report and Order creating an incubator program to incentivize existing broadcasters to assist new entrants to get into broadcast ownership. The FCC in its order last year relaxing TV local ownership rules and abolishing the newspaper-broadcast cross-ownership rule had agreed to adopt an incubator program (see our articles here and here). In fact, the US Court of Appeals for the Third Circuit, which is reviewing the FCC’s ownership order, stayed the processing of that appeal to await the rules on the incubator program (see our article here), as the Court has previously indicated that considerations of how changes in the ownership rules affect new entrants is part of its analysis of the justification for such changes. What rules did the FCC adopt?
The FCC will encourage an existing broadcaster who successfully incubates a new entrant into broadcasting by giving them a “presumptive waiver” of the ownership rules. To understand what this means requires looking at several questions including (1) what services does the existing broadcaster have to provide to qualify for the credit; (2) which new entrants qualify for incubation; (3) what is a successful incubation; and (4) what does the presumptive waiver provide to the broadcaster providing the incubation services. Let’s look at each of these questions.
What services qualify as incubation? The FCC did not lay down hard and fast rules as to exactly what constitutes an incubation of an entrant. But it did say that incubation will likely consist of either financial assistance or management and operational services and training, or a combination of both. Any incubation plan needs to be submitted to the FCC for approval either with an application by the new entrant to acquire the station or in a petition for declaratory ruling if the new entrant already owns the station and is seeking incubation to help make it a success. As part of the plan, a written contract setting out the relationship between the parties must be submitted for FCC review.
The FCC did, however, put limits on the incubation. If the existing station provides financing by taking an equity interest in the company that is being incubated, the new entrant must retain voting control of the licensee of the incubated station. In addition to control, the new entrant will have to have at least a 15% equity interest in the company, and that interest will need to be at least 30% if some other entity (such as the broadcaster providing the incubation services) has more than 25% of the entity.
The new entrant must also have an option to buy back any interest that the existing station takes in the incubated station at the end of three years, at no more than fair market value. The new entrant may decide not to exercise the option at the end of three years, or it may decide to sell the incubated station – but the incubation will only be considered successful if the new entrant holds on to control of the incubated station or sells it and turns around and uses its proceeds to buy another radio station.
The new entrant must at all times maintain control of the licensee of the incubated station. The existing station cannot provide programming services to the new entrant through an LMA. It can do a JSA or Shared Services Agreement but, as the goal of the program is to end up with a successful, independent operation, the JSA or SSA must end after two years.
Who qualifies to be incubated? Initially, this program will only apply to radio stations. The FCC decided that radio offers the best opportunity for new entrants to get into the broadcasting business, though it may reevaluate that conclusion in the new Quadrennial Review to determine if incubation should be extended to television as well. While we have termed the entity being assisted by the incubator program as a “new entrant,” in fact that entity can have up to three other radio stations in addition to the station being incubated. So this program is also designed to assist small owners become more successful.
In addition to having no more than three existing radio ownership interests, any party being incubated must also meet Small Business Administration standards for being a small business. To be a small business under SBA rules, an entity must have less than $38.5 million in revenue. Note that the SBA rules attribute revenue from some affiliates of the entity being evaluated, so a big company can’t set up a shell corporation to be incubated. The FCC will also require certifications that the entity being incubated could not have acquired the incubated station or operated it successfully without the assistance of the company providing the incubation assistance. The new entrant will also be required to disclose all family broadcast interests to show that the entity is independent. The FCC reserves the right to investigate these certifications, and notes that it will revoke permission for an incubation program if it finds that the company being incubated in fact had access to a source of funds that made the incubation unnecessary (e.g., a “trust fund” in the example given by the FCC).
The existing station can help to incubate no more than one station in any given market. If it seeks to incubate stations in multiple markets, it will need to demonstrate that it has the capacity to do so.
When is an Incubation Successful? The incubation is normally to be for a period of three years. However, an incubated entity can ask for early termination if things take off, or one extension of up to three years. As noted above, the incubation will be successful if, at the end of three years, the incubated station can stand on its own, or if it has been sold with the new entrant buying another AM or FM station with the proceeds.
At the end of the incubation period, the parties must file a joint certified statement setting out the results of the incubation, and describing how the incubation assisted the new entrant to become a stable operation. If the FCC’s Media Bureau does not conclude that the incubation was unsuccessful within 120 days (or any longer period that the Bureau determines is necessary to review the final certifications), the station that provided the incubation services will get a presumptive waiver allowing it to exceed the multiple ownership rules in any comparably sized market.
What is the benefit of a Presumptive Waiver? The entity providing the incubation services will receive a Presumptive Waiver allowing it to acquire one station more than is allowed under the current FCC radio ownership rules. That waiver can be used for an acquisition of any station in a comparably sized market, i.e. one that has the same limits on the number of stations that can be owned in the market where the incubated station is located. So if an entity incubates a station in a market where one owner is allowed to own up to 6 stations, no more than 4 of which can be FM stations, that entity can acquire a 7th station in any market subject to the same ownership limits. The waiver can also be used in the same market as the incubated station. Once acquired, that additional station can be sold as part of the cluster of stations in the same market without any need for divestiture.
However, there are limits on the use of the waiver. The waiver cannot be used if the entity using the waiver would end up with more than 50% of the stations in the market. In addition, the market must have at least the same number of independent radio owners as the market in which the incubation occurred (at the time of the start of the incubation). Thus, if there were six independent radio station owners in the market where the incubation occurs, there must be at least 6 independent owners in the comparable market for the waiver to be used. The waiver must be used within 3 years of the end of the successful incubation.
There are many additional nuances to the incubator program, so if you are interested in taking advantage of the program, either to incubate a station to get a possible waiver of the radio ownership limits, or to help assure the success of a new station, read the Order and accompanying rules carefully, and seek assistance of an attorney familiar with FCC practice. These rules will become effective after they are approved under the Paperwork Reduction Act, and after the necessary changes to the FCC forms have been made.