Beware: The UHF Discount Is Rising From The Dead

The ultra high frequency (UHF) Discount is the zombie of media policy, likely to rise from the dead this week at the Federal Communications Commission’s April 20, 2017 meeting. The likely restoration of the UHF Discount raises interesting legal issues, since no one disputes that the policy rationale for its adoption has long since disappeared. Those arguments will play out at the Federal Communications Commission and, perhaps, in the courts, but this post is about the colorful history of the UHF Discount and why restoring it would likely lead to vastly increased concentration of control of TV stations in this country.

FCC Chairman Ajit Pai has made plain that he intends to relax or repeal almost all of the Commission’s restrictions on how many media properties a broadcaster can own or operate. However, the very first item on his list, which he has slated for expedited consideration, actually restores a very important, if seemingly arcane, provision that his predecessor had deleted - the so-called UHF discount.

Chairman Pai’s radical deregulatory agenda has only one historical precedent, that of Mark Fowler, the Reagan-era FCC Chairman. Fowler was very successful in many of his initiatives, especially with respect to broadcasting and cable regulation. But one area where he had only partial success was his effort to lift the national ownership cap limiting how many TV stations one company can own.

The FCC’s national TV ownership rules are based on “audience reach.” Broadcasters have been limited to owning stations which do not serve more than 39 percent of the nation’s TV homes. However, in calculating that number, only half of the audience of stations broadcasting on UHF channels is counted towards the limit. Thus, an owner of a UHF station in New York (6% of the nation’s TV homes) would have only half of the audience (3%) applied towards the 39% national cap.

The UHF discount was a sound policy decision when it was adopted in 1985. At the time, UHF stations operated at a very serious disadvantage, and it was logical to recognize this disparity by affording them less weight. However, this disparity no longer makes any sense at all. For one thing, most TV viewing is now via cable or satellite. More importantly, since the transition to digital TV in 2009, the VHF/UHF distinction became meaningless to viewers. Many VHF stations moved to UHF frequencies as part of the spectrum changeover, and in most cases, UHF transmission is actually more desirable.

It took a long time for policymakers to get around to repealing the UHF Discount. Although the FCC signaled for a long time that repeal of the UHF Discount was in the offing, the Democrats controlling the FCC since 2009 did not get around to pulling the trigger until last September. This dilatory timing meant that the decision was not final, so that broadcasters were able to seek reconsideration from the new Republican FCC majority.

There are several large broadcast group owners which have relied on the UHF Discount to permit them to claim that their audience reach does not exceed the 39% cap. Some have strong ties to the Trump Administration, including Fox, Sinclair and Nexstar. (Other current beneficiaries of the discount include Ion, Tribune and Univision.) Because they had been on notice that the FCC has intended to eliminate the UHF Discount, they have been constrained from purchasing more TV stations or from selling their stations as a group. For this reason, industry analysts and trade press journalists agree with the Wall Street Journal headline informing readers that “FCC Tees Up Rule Change That Could Spur Wave of TV Industry Mergers.”

The story behind the UHF Discount is an interesting one.

Until 1984, the FCC imposed a “7-7-7" rule limiting broadcasters to holding seven AM, seven FM, and seven TV stations. (There were - and still are - other rules restricting how many stations a company can own in a particular local market.) In 1984, the Fowler-led FCC adopted rules which would have lifted the limits on the number of TV and radio stations by adopting a “transitional” 12-12-12 rule for six years and then eliminating any national ownership cap.

When the FCC first proposed the ownership changes, public interest groups complained vociferously, albeit ineffectually. However, once the rules were adopted in 1984, new and much more imposing opposition arose from smaller, independent broadcasters and, most importantly, from the extremely powerful motion picture industry. At the time, motion picture studios could not own television networks, and the prospect of the three incumbent networks (Fox did not yet exist) buying up more TV stations posed a serious threat to the studio’s TV production business. Led by legendary lobbyist Jack Valenti, the Motion Picture Association of America was able to delay implementation of the new rules by means of a Congressional appropriations rider. The opponents then succeeded in getting the FCC to make the 12 station limit permanent and, of particular relevance here, add a “national audience reach” cap, under which no company could own stations reaching more than 25% of the nation’s TV homes, no matter how many stations were owned. The audience reach limitation was directed at the three networks; since the stations they owned and operated (as opposed to network affiliates owned by others) were concentrated in the largest cities, the audience cap gave them very little headroom to add more stations. (Note that the cumulative reach of New York, Los Angeles and Chicago alone is about 15% of the nation.)

Enter the UHF Discount. Older readers will recall what younger readers may not know; in the 1980's, before cable TV was deployed in most major cities, there were two species of over the air TV channels. The first channels authorized were in the VHF band (channels 2-13). The dominant stations, including the network-owned stations, were all VHF stations, which had superior signal reach and were easy to receive on standard TV sets. By contrast, UHF stations (originally, channels 14-83) had smaller service areas, generated fuzzier pictures and sound and were often stymied by trees and weather storms. Even more importantly, it was hard to tune in a UHF station. Older TV sets could not receive UHF signals at all unless the user purchased a separate converter box. Congress tried to fix this in 1961, by enacting the All-Channel Receiver Act, which mandated that new TV sets had to receive UHF signals, but it was still hard to tune in UHF stations until manufacturers were required to change the tuners so users could “click” to a specific channel rather than have to hone in with a dial that did not have specific channel settings. Many struggling UHF stations went off the air, although they slowly began to become more viable after the FCC adopted its so-called “fin-syn rules” in 1970. (These rules prohibited the major networks from owning or controlling syndication rights of programming they carried.)

The weakness of UHF stations posed a policy dilemma for the FCC, which had to account for the fact that UHF stations were so much less valuable and reached so many fewer viewers. Owners of several VHF TV stations in larger markets had much more economic and political clout than a company owning many more UHF stations in smaller markets. Thus, the FCC decided to attribute only half of a market’s population in calculating the limit on audience reach.

Over time, the FCC eased the numerical limit (originally 12 stations) and, in 1996, Congress repealed it entirely in its rewrite of the 1934 Communications Act in 1996. This was a major sticking point in the final negotiations over what became the Telecommunications Act of 1996; although Republicans wanted to repeal the audience cap as well, the Democrats resisted and the parties compromised by raising the audience cap from 25% to 35%.

One other concession that the Republicans obtained in the 1996 Telecommunications Act was a requirement that the FCC revisit all of its ownership rules every two years. (You can read more about the history of this provision here.) Once the Republicans took the White House, Bush-era FCC Chairman Michael Powell attempted to use this mechanism to substantially ease all the FCC’s broadcast ownership rules, and led the new Commission majority to vote to raise the national ownership cap to 45%. There was bipartisan opposition from Congress, which nearly voted to rescind the Powell decision. Instead, it adopted an appropriations rider which set the ownership cap at 39%, because CBS and Fox had been given temporary waivers to reach that level, and they would have had to divest some stations to get back to 35%.

The 39% cap, including the UHF Discount, has remained in place despite the fact that no one seriously argues that UHF status confers any disadvantage. There is some controversy over whether the FCC can change the 39% limit, but the authority to change how to calculate it, i.e., using the UHF Discount, is more clear, and that is what the FCC did last fall. That has paved the way for the new membership of the FCC to begin its path to deregulation by reimposing a regulation - the revivified UHF Discount.