FTC Staff Comment Before the Federal Communications Commission In The Matter of Evaluation of the Syndication and Financial Interest Rules

BEFORE THE
FEDERAL COMMUNICATIONS COMMISSION
WASHINGTON, D. C. 20554
In The Matter of .
•
Evaluation of the Syndication
and Flnanclal Interest Rules
)
)
)
)
MM Docket No. 90-162
Further Comment of the Staff of
the Bureau of Economics 	•
of the Federal Trade Commission
December 21, 1990
• This comment represeDts the views of the staff of the Bureau of EcoDomics
of the Federal Trade CommissioD. 	They are Dot Decessarily the views of the
CommissioD or aDy iDdividual CommissioDer. Inquiries reeardiDe this comment
should be directed to Bruce H. Kobayashi (202-326-3363) of the FTC's Bureau
of EcoDomics.

BEFORE THE
FEDERAL COMMUNICATIONS COMMISSION
WASHINGTON, D. C. 20554
In The Matter of
Evaluation of the Syndication
and Financial Interest Rules
)
)
)
)
MM Docket No. 90-162
Further Comment of the Staff of
the Bureau of Economics
of the Federal Trade Commission l
I. 	Introduction
The staff of the Federal Trade Commission (FTC) appreciates this
opportunity 	to 	submit 	a 	further 	comment 	in 	response 	to 	the 	Federal
Communication Commission's (FCC) Further Notice of Proposed Rulemaking
(FNPRM) to evaluate the financial interest and syndication ("Fin-Syn") rules. 2
The FCC is seeking comment on a variety of options to modify the Fin-Syn
rules. 	Our further comment addresses certain issues relating to economic
efficiency, competition, and the enforcement of the antitrust laws. It does not
discuss other policy considerations that may be of interest to the FCC. 3
Section II of this comment summarizes the relevant expertise of the staff
of the FTC. 	Section III reviews the history of the current rulemaking, and
provides a brief overview of our earlier comments in this proceeding. 	In our
1 This comment represents the views of the staff of the Bureau of Economics
of the Federal Trade Commission. 	They are not necessarily the views of the
Commission or any individual Commissioner. Inquiries regarding this comment
should be directed to Bruce H. Kobayashi (202-326-3363) of the FTC's Bureau
of Economics.
2 See Further Notice of Proposed Rulemaking In the Matter of the Evaluation
of the Syndication and Financial Interest Rules, MM Docket No. 90-162, issued
October 22, 1990.
3 This further comment is based on positive economic analysis and therefore
does not explicitly address normative concerns falling outside the scope of such
an analysis. 	These and other concerns not explicitly addressed in this further
comment should be considered separately.

most recent comment, we concluded that a compelling economic case did not
exist for continuing to impose a per se ban on the acquisition of certain
ownership rights by television networks, that competition would be better
served 	by 	removing 	the 	restrictions, 	and 	that 	any 	instances 	of 	alleged
monopolization 	could 	be 	addressed 	through 	application 	of 	conventional
antitrust enforcement powers.· These conclusions were largely based upon an
analytical assessment of possible anticompetitive problems and the likely ability
of the Fin-Syn rules to correct those problems. We also found no evidence that
the networks behaved anticompetitively prior to the enactment of the rules.
Furthermore, we found that subsequent changes in the market have made
anticompetitive behavior unlikely in the future.
Section IV examines several regulatory options discussed in the FNPRM
These options include several regulatory policies apparently designed to attain
a compromise solution between the "polar extremes" of complete repeal and
retention of the rules as they currently exist. 	We comment on two basic types
of compromise solutions that raise competition policy issues: (a) the regulation
of the negotiation process between the networks and the producers and (b) the
regulation of network ownership of financial interest and syndication rights.
We believe that regulating the negotiation process is unlikely to affect
the ultimate outcome of the negotiations. 	Thus, we do not find compelling
reasons to adopt any of the proposed restrictions on the negotiation process.
Further, since the regulation of negotiations can potentially increase the costs
of bargaining and might cause mutually beneficial transactions to be bypassed,
adoption of these regulations may reduce efficiency. 	With respect to the
regulation of network ownership rights, we suggest that conventional antitrust
• See Comment of the Staff of the Bureau of Economics of the Federal Trade
Commission. In the Matter of the Syndication and Financial Interest Rules, MM
Docket No. 90-162, September 5, 1990.
2

enforcement be used instead of specific regulatory limits. 	Thus, we also find
no compelling reason to adopt regulations that would prohibit or limit network
ownership of syndication rights.
II. 	Expertise of the Staff of the Federal Trade Commission
The 	FTC 	is 	an 	independent 	regulatory 	agency 	responsible 	for
maintaining competition and safeguarding the interests of consumers. 5 	In
response to requests by federal, state, and local government bodies, the staff of
the FTC often analyzes regulatory or legislative proposals that may affect
c competition or the efficiency of the economy. 	In the course of this work, as
well as in antitrust and consumer protection research, nonpublic investigations,
and litigation, the staff applies established principles and recent developments
in economic theory to competition and consumer protection issues, including
efficiency rationales for rate and entry regulation. 6
The FTC staff previously has issued three comments to the FCC on the
Fin-Syn rules.7 The FTC staff also has commented on a variety of other issues
before the FCC, including: (I) issues concerning competition, rate deregulation
and the FCC's policies relating to the provision of cable television service;8 (2)
5 15 U.S.c. §§ 41- 59.
6 See, e.g., Mathios and Rogers, The Impact of State Price and Entry Regulation
on Intrastate Long Distance Telephone Rates, Bureau of Economics Staff Report
to the Federal Trade Commission, November 1988.
7 See Comments of the Bureaus of Consumer Protection, Economics. and
Competition of the Federal Trade Commission, In the Matter of Amendment of
47 CFR § 73.658(j)(The Syndication and Financial Interest Rule), January 27,
1983; Reply Comments of the Bureaus of Consumer Protection. Economics and
Competition of the Federal Trade Commission, In the Matter of Amendment of
47 CFR § 73.658(j)(The Syndication and Financial Interest Rule), April 26,
1983, and the FTC staff comments in this Docket, supra note 4.
8 See Comment of the Staff of the Bureau of Economics and the San Francisco
Regional Office of the Federal Trade Commission In the Matter of Competition,
Rate Deregulation and the Commission's Policies Relating to the Provision of
Cable Television Service, MM Docket No. 89-600, April 20, 1990.
3

elimination of the prohibition on common ownership of cable television systems
and national television networks;9 (3) rules relating to whether cable television
systems "must carry" television broadcast signals;10 and (4) the FCC requirement
that 	broadcast 	licenses 	be 	held 	for 	at 	least 	three 	years 	before 	being
transf erred.l1
III. 	Backerouod
A. 	History of the Curreot Rulemaklol
On January 30, 1990, Fox Broadcasting Company ("Fox") filed a Petition
for Resumption of Rulemaking and Request for Relief ("Petition") in BC Docket
No. 82-345. Fox sought: (i) a temporary waiver to avoid application of the Fin-
Syn and prime time access rules to the Fox television network and its affiliates;
and (ii) a resumption of the FCC's consideration of the proposed changes in the
Fin-Syn rules, 47 C.F.R. § 73.685(j)(I)(i) and (ii). Subsection (j)(I)(i) of the Fin-
Syn rules forbids broadcast networks from engaging in the domestic syndication
of any program or the foreign syndication of independently-produced (i.e., non-
network 	produced) 	programs.12 	Subsection 	(j)( l)(ii) 	prohibits 	broadcast
networks from obtaining any financial or proprietary right or interest in the
exhibition, distribution, or use of programs produced by others except for the
9 CT Docket No. 82-434.
10 MM Docket No. 85-349.
11 BC Docket No. 81-897.
12 "Syndication" refers to the sale of programs on a market-by-market basis
to independent television stations. There are two basic categories of syndicated
programs, "first-run" and "off-network". 	First-run syndicated programs are
shows produced specifically for the syndication market. Off -network programs
are shows that originally ran on a network and are sold as re-runs in the
syndication market.
4

exclusive right to network exhibition in the United States.I! That is, the Fin-
Syn rules currently prohibit networks from engaging in program syndication,
and from sharing in the profits from off -network distribution of any program
not produced by the network. 	The rules were intended to constrain the three
major networks' ability, individually or collectively, to act as monopsonists in
the purchase of programs from independent producers, and from acting as
monopolists in the sale of "off -network" programs to independent stations.
In response to the Fox petition, the FCC instituted a new rulemaking to
evaluate the Fin-Syn rules. 14 On October 22, 1990, the FCC, responding to the
. comments and reply comments filed in response to the Notice of Proposed
Rulemaking (NPRM) in MM Docket 90-162, issued a Further Notice of Proposed
Rulemaking (FNPRM) to evaluate several options to modify the Financial
Interest and Syndication (Fin-Syn) rules. n
B. 	Previous FTC Staff Comments on the Fin-Syn Rules
The staff of the FTC has filed three previous comments with the FCC
regarding the Fin-Syn rules. 	In 1983, the staff filed a comment and a reply
comment on a similar proposal to modify or repeal the Fin-Syn rules. 16 In these
comments, the staff expressed doubts that the Fin-Syn rules had served any of
I! The rule bars only the acquisition of broadcast rights. The networks are
allowed to acquire non broadcast (i.e., cable or pre-recorded video) rights. 	See
87 F.C.C. 2d. 30 (1981) and Viacom Int. Inc. v. F.e.c., 672 F2d. 1034 (1982).
14 The Fin-Syn rules apply to networks defined as "interconnected program
services" with 15 or more programming hours per week to at least 25 affiliated
stations in 10 or more states." 	See 47 C.F.R. §73.658(j)(4). 	On March 14, 1990,
Docket No. 82-345 was terminated, and in a separate order, MM Docket No. 90-
162, a new rulemaking to evaluate the Fin-Syn rules was instituted. 	Fox's
request for temporary relief, addressed in a separate non-docketed proceeding,
was granted on May 4, 1990. 	The waiver, passed by a 4-0 vote, allows Fox up
to 18.5 hours of programming. 	The waiver lasts for a period of one year.
15 See Further Notice of Proposed Rulemaking, In the Matter of the Evaluation
of the Syndication and Financial Interest Rules, MM Docket No. 90-162, issued
October 22, 1990.
16 See FTC staff comment and reply comment, supra note 7.
5

the FCC's goals. In addition, the staff's analysis suggested that the rules likely
would reduce efficiency in the market for new programming. Accordingly the
staff recommended that the rules be repealed.
On September 5, 1990, the FTC staff filed a comment in response the
FCC's NPRM in this docket. 17 Our comment addressed two major competition
policy issues addressed by the rules: the networks' ability to act as monopsonists
in the purchase of programming, and the networks' ability to act as monopolists
in the sale of off-network programming. 	With respect to the monopsony issue,
any such power held by the networks (and existing evidence did not support
such a claim) has likely declined due to changes in the marketplace. 	In
addition, we noted that, even if monopsony power were present, prohibiting or
restricting the extent of vertical integration by the networks would exacerbate,
rather than diminish, the attendant welfare losses. With respect to the monopoly
issue, we noted that this concern arises only if the relevant antitrust market is
limited to "newly-produced-off-network" programs and that existing (albeit
scarce) evidence did 	not support such a 	market definition. 	Given these
considerations, we concluded that: (i) a compelling economic case does not exist
for continuing to impose a per se ban on the networks' acquisition of certain
ownership rights to newly-produced television programs; (ii) competition would
be 	better served 	by 	removing 	the 	restrictions; 	and 	(iii) any 	instances 	of
anticompetitive behavior could be better addressed through application of
conventional antitrust enforcement powers.
17 See the FTC staff comment, supra note 4.
6

IV. 	The FNPRM
The FNPRM seeks additional comment on an array of regulatory options
contained in the comments and reply comments submitted in response to the
original NPRM 	In general, the options on which the FCC seeks comment
"suggest 	modification 	of 	the 	financial 	interest 	rule, 	subject 	to 	certain
safeguards, and a narrowing of the prohibitions against network participation
in foreign and domestic syndication,,,18 	While neither complete repeal nor
complete retention of the rules has been ruled out, the FNPRM focuses on
various compromise solutions. 19 Given this focus, our comment will analyze the
"compromise options" contained in the FNPRM 	We have grouped the options
into 	two major categories: (a) regulation of the negotiations between 	the
networks and producers, and (b) relaxation but not elimination of the ownership
restrictions currently placed on the networks by the Fin-Syn rules.
A. 	Regulation of the Negotiations
The FCC has solicited comment on two basic options to regulate the
negotiations for syndication rights: prohibiting negotiations over syndication
rig!tts until after the completion of negotiations over the network fee,20 and/or
allowing negotiations over syndication rights to take place if and only if the
seller initiates the negotiations,21 The FCC has also requested comment on the
practice of deficit financing,
J. 	An Analysis 0/ the Regulations
The FNPRM requests comment on regulations that would control both
the order and the time period in which negotiations over the syndication rights
18 See the FNPRM, supra note 2, p. 1.
19 See the FNPRM, supra note 2, item number 22 and Broadcasting Magazine,
October 29, 1990, p. 31.
20 See the FNPRM, supra note 2, item number 10.
21 See the FNPRM, supra note 2, item number 9.
7

for an individual program could take place. 	Specifically, one option would
require that negotiations over the syndication rights could only take place
separately 	and 	after 	the 	negotiations over 	the 	network 	rights 	have 	been
concluded and a pilot has been scheduled. 	In addition, the FCC has asked for
comment on whether negotiations over syndication rights should be prohibited
after some specified point in time. 	If both of these options were adopted,
negotiations would be allowed to take place only during a prespecified window
of time.
Economic analysis suggests that separating negotiations over the network
fee from those over syndication rights will not alter the overall bargaining
outcome. The explanation for why the split-negotiation option would not affect
the ultimate bargaining outcome was contained in the 1980 Report of the FCC
Network Special Staff Inquiry.22 The Report demonstrates that if the networks
possess market power, the Fin-Syn rules (which essentially forbid the second
round of negotiations) could not diminish their ability to exercise that power.
Prohibiting (or limiting) the networks from owning syndication rights forecloses
only one vehicle with which the networks could extract monopoly profits; other,
potentially equally effective, vehicles remain available. 	For instance, the
Report demonstrates that any increase in compensation a producer expected to
receive from holding (rather than selling) the syndication rights could be
extracted by the networks through a reduction in the fees paid (or by charging
a slotting allowance) to the program producers for the original network runs.
Thus, separating the negotiations over the network fee and the syndication
rights can change the way in which a producer is compensated, but the expected
22 See. 	Network 	Inquiry Special Staff, New 	Television Networks: 	Entry.
Jurisdiction. Ownership and Regulation. Volume II (F.e.c. 1980). See, also Warren-
Boulton, Economic Analysis and Policy Implications of the Financial Interest and
Syndication Rule. Submitted on Behalf of the Coalition to Preserve the Financial
Interest and Syndication Rule, MM Docket 90-162, June 14, 1990.
8

total amount of compensation a program producer receives should remain
constant.: ll
In addition, separating the negotiations over the network fee and the
syndication rights would not effectively prohibit the networks from exercising
their market power in the way envisioned by the economic model submitted by
the Coalition to Preserve the Financial Interest and Syndication rule. 24 Under
the assumptions of the Coalition's model, only a limited financial interest in the
revenues 	(not 	profits) 	from 	syndication 	is 	required 	to 	diminish 	the
programmers' incentives to make investments that improve the value of the
. program in the syndication (but not in the first-run network) market. Thus, to
the extent the model describes accurately the syndication market, the networks
could achieve the desired effect on programmers' incentives so long as the
negotiations for syndication rights occur prior to the latter years of the network
run. 	Given that the options typically suggest a relatively short delay between
negotiations over the network fee and syndication rights, the Coalition's model
would appear to predict that these regulations on the negotiations would be
an~lytically equivalent to complete repeal of the rules.
The neutrality argument contained in the Network Inquiry Special Staff
Report (i.e., that the ultimate outcome of the 	bargaining process will 	be
unchanged) appears to hold with equal force for all of the proposed regulations
affecting negotiations cited in the FNPRM 	Prohibiting 	negotiations for
syndication rights after a certain date and forbidding 	the networks from
initiating the negotiations also would seem unlikely to alter the 	ultimate
bargaining outcome or have an effect on the networks' ability to exercise
market 	power. 	Such 	regulations 	might 	increase 	the 	producer's 	expected
2ll The regulations are likely to increase the deficits faced by the producers.
The issue of deficit financing is discussed in Section IV.A.2, infra.
24 See the Coalition's economic comment, supra note 22.
9

revenues from the sale of syndication rights due to increased bargaining power
in 	the second 	negotiation,26 but this increase can also be expected 	to be
anticipated 	by 	the networks and 	offset by decreases in the 	network 	fee.
However, such restrictions on the types of permissible contracts might prevent
contracts that would have otherwise been voluntarily agreed to. 26 For example,
26 In terms of the economic model of bargaining, the proposal that prohibits
the networks from initiating the negotiations could be thought of as dictating
who makes the first offer in the second negotiation. 	The economic literature
on bargaining suggests that changes in the order of offers and counteroffers can
change the second round bargaining outcome. 	In general, there seems to be a
first mover advantage when there is complete information about the relative
values placed on the good by the two parties. 	See, e.g., Rubinstein, "Perfect
Equilibrium in a Bargaining Model," 50 Econometrica 97 (1982). However, since
the regulations only apply to the second round of the bargaining process (and
not the first), the ultimate outcome is unlikely to be changed. The first mover
advantage can also arise in incomplete information settings, although such
results are in general not unique and require strict and sometimes arbitrary
assumptions about non-equilibrium beliefs of the bargainers. 	See, e.g., Perry,
"An Example of Price Formation in Bilateral Situations: 	A Bargaining Model
with 	Incomplete 	Information," 	54 	Econometrica 	313 	(1986). 	Another
interpretation of this proposal would be that only the seller would be able to
make offers in the second-round, with the networks able only to reject any
offers. This would also give the seller a second-round (but not a first-round or
overall) advantage over the regime where either the seller or buyer could make
offers. 	For such a model of bargaining, see Fudenberg, Levine and Tirole,
"Infini te-Horizon Models of Bargaining with one-sided Incomplete Inf orma tion,"
in Roth, cd. Game-theoretic Models of Bargaining, Cambridge University Press
(1985). 	Prohibiting bargaining over syndication rights after a certain time
period has passed would be akin to changing the second-round negotiations from
an 	infinite horizon 	to a finite 	horizon 	model. 	The economic bargaining
literature is also mixed with respect to the effects from this change. 	See
Fudenberg, et al .. id.
26 In 	general, 	legal 	restrictions on 	the 	types of contracts allowed are
inefficient and cannot be in the best interest of both parties. 	Efficiency
explanations for legal restrictions on contracts are based on the existence of
externalities 	imposed 	on 	third 	parties 	(e.g.. 	society). 	See. 	e.g.. 	Rubin,
"Unenforceable Contracts, Penalty Clauses and Specific Performance," 10 J.
Legal Stud. 237 (1981). 	For a non-externality based argument, see Aghion and
Hermalin, "Legal Restrictions on Private Contracts Can Enhance Efficiency,"
6 J. L. Econ. & Org. 381 (1990). 	In this model, restrictions on contracts may
reduce expenditures on information production. 	However, this reduction may
cause movements toward or away from 	the efficient level of information
production. 	The staff of the FTC, in examining proposed state restrictions on
advertising and other types of information production, has generally concluded
that any such restrictions should be limited to deceptive or misleading claims.
See, e.g .. Letter to Albert Bell, Esq, reo proposed amendments to the Ohio Code
of Professional Responsibility, from M 	D. Kindt, Regional Director, FTC
Cleveland Regional Office, November 3, 1989.
10

not allowing the networks to initiate negotiations or prohibiting bargaining
after some date could conceivably cause some mutually beneficial transactions
to be forgone.
In sum, we conclude that regulating the negotiation process is unlikely
to affect the negotiated outcome. 	Economic analysis suggests that even if the
proposed 	regulations 	increase the explicit price 	paid 	by the 	network 	for
syndication rights, any such gains are likely to be offset by a reduction in the
network fee. 	In addition, the restrictions may increase negotiating costs,
causing mutually beneficial transactions to be bypassed. Given the possibility
that regulating the negotiation process can potentially increase costs without
altering the ultimate outcome, we conclude that there is no obvious basis to
support the restrictions on negotiations contained in the FNPRM
2. 	Deficit Financing
The FCC has also asked for comments on deficit financing, and whether
deficit financing would disappear if networks were allowed to purchase "back-
end rights".27 As has been pointed out by previous commenters on the Fin-Syn
rules, it is exactly the ban on networks' ownership of syndication rights that
gives rise to "deficit financing".28 If programs were supplied competitively and
networks were allowed to purchase all rights to a program, the total fee paid by
the network (including the network fee and compensation for the expected
value of the syndication rights) to the marginal producer would equal the costs
27 "Back 	end 	rights" 	include 	domestic and 	foreign 	syndication 	rights,
revenues from video sales and other promotional items. See the FNPRM. supra
note 2, footnote 9.
28 See Besen, Krattenmaker, Metzger, and Woodbury, Misregulating Television:
Network Dominance and the FCC, Chicago: Univ. of Chicago Press (1984), pp.
131-132.
11

of producing the program. 2g If the networks were barred from purchasing some
or all of the syndication rights, one would expect the networks to pay for only
the limited rights acquired. 30 Under these circumstances, the size of the deficit
will equal the total expected value of the rights retained by the producer. Thus,
"deficit financing" can be expected to persist as long as some restrictions on
network ownership are retained, and the more severe the restrictions, the larger
will be the expected deficits.
B. 	Regulation of the Networks' Ownership Rights
The 	second 	set 	of 	regulatory 	options 	relax, 	but 	do 	not 	abolish,
restrictions on the types of rights the network can own. The options concerning
the regulation of ownership rights contained in the FNPRM are varied. Options
include 	(l) distinguishing 	foreign 	from domestic syndication 	rights;31 (2)
structural limitations on total program ownership by a network;32 and (3) the
(de facto) restriction of control rights. 33 Each of these are discussed in separate
2g Studies 	of 	network-programmer 	relationships 	suggest 	that 	prior 	to
adoption 	of 	the 	rules, 	the 	networks 	compensated 	program 	producers 	for
syndication rights, and these up front payments approximated the expected
value of these rights in the syndication market. 	See. e.g •. Crandall, "FCC
Regulation, Monopsony, and Network Television Program Costs," 3 Bell J. of
Econ. 483 (1972), and Woodbury, Besen and Fournier, "The Determinants of
Network 	Television 	Program 	Prices: 	Implicit 	Contracts, 	Regulation 	and
Bargaining Power," 14 Bell J. of Econ. 351 (1983).
30 As noted by Besen, et al .. supra note 28 at 131, "It would be surprising
indeed if the networks, in acquiring the typical rights to two runs of series
episodes, agreed to compensate producers for all their production costs. 	One
would no more expect the network to pay the full value of a series when such
limited rights are acquired than one would expect the first person who leases
a car to pay the entire cost of its production."
31 See the FNPRM, supra note 2, item number 20.
32 	See the FNPRM, supra note 2, item numbers 11-13 and 24-25. 	These
structural limits would prevent the networks from taking an ownership position
or from producing in-house more than a certain percentage of their current
prime time schedules.
33 See the FNPRM, supra note 2, item number 15 (anti-discrimination rules),
item numbers 26-28 (anti-warehousing rules), and item numbers 14, 19,21 and
22 (limiting networks to minority (noncontrolling) ownership positions).
12

su b-sections.
1. 	Domestic versus Foreign Syndication Rights.
From an antitrust perspective, there is a simple difference between
allowing the networks to acquire foreign versus domestic syndication rights.
The acquisition of foreign syndication rights by the network cannot harm
domestic independent television stations and their viewers even if the networks
can act as monopolists in the sale of off-network programming to these stations.
Thus, one would restrict acquisition of foreign syndication rights only if
questions of network monopsony power exist. 	Given the unlikely chance that
such power exists (and the absence of any evidence in support of it), we
question whether any limitation on network ownership of foreign syndication
rights is warranted. 	Whether any restrictions on domestic syndication rights
should be retained are discussed in the remainder of the comment.M
2. 	Structural Limitations on Program Ownership by the Networks
Another set of compromise options contained in the FNPRM involve
structural 	regulations on 	each 	network's ownership of domestic 	financial
interests and syndication rights. 	The FNPRM contains options to limit the
ability of networks to integrate forward into syndication and to integrate
backward into production.
0) 	Limits on Forward Vertical Integration by the Networks
As a safeguard to prevent the networks from exercising market power
in the sale of syndicated programming, the FNPRM requests comment on
options to limit the share of programs in which the networks can take a
34 In a somewhat related matter, the FNPRM solicits comments on the likely
reasons for and effects of increased foreign ownership of program producers.
See the FNPRM. supra note 2, Section IV. 	From an antitrust perspective,
foreign 	ownership, per se, does not imply anything about anticompetitive
behavior, all 	other 	things 	held constant. 	See Section 	3.23 of 	the U. S.
Department of Justice Merger Guidelines, June 14, 1984, reprinted in 4 Trade
Reg. Rep. (CCH) para. 13,103.
13

financial or ownership interest. As noted in our earlier comment, it is not clear
that such safeguards are necessary.36
Limiting the networks' ability to retain ownership interests in their
prime 	time 	programs would 	require a 	showing 	that "newly-produced-off-
network" 	programs constitute 	a 	relevant antitrust 	market. 	At 	this 	time,
however, this crucial first step of traditional antitrust analysis, defining the
relevant antitrust market, has not been resolved. 36 If anything, currently
available evidence suggests that "newly-produced-off -network" programs do not
constitute a relevant antitrust market. 37 Unless the existence of such a limited
market can be established, structural limitations on any network's ownership
rights would not appear necessary because the networks, individually or as a
group, seem unlikely to be able to acquire market power in a broader market
containing "all off -network-syndicated programs" or "all syndicated programs."
The options contained in the FNPRM generally limit an individual
network's rights of ownership to a maximum percentage of its total prime time
schedule. We would suggest that, to the extent that structural limits are used at
. all, they should be defined as a percentage of the total number of programs in
the relevant antitrust market, (e.g .• syndicated or "off -network" syndicated
programs). 	Further. we suggest that any implementation of binding limits be
based on the finding that the major networks together possess market power in
the relevant market. 	When market power does not exist, ownership limits that
are 	binding 	at 	a 	small 	percentage 	of 	a 	network's 	schedule 	can 	inhibit
procompetitive contractual arrangements. For example. strict ownership limits
could constrain or deter the formation of an "emerging network" because the
36 See the FTC staff comment. supra note 4. Section VII, pp. 22-36.
36 See the U. S. Department of Justice. Merger Guidelines, supra note 34.
37 See our earlier comment, supra note 4, Section IV.A, pp. 23-28.
14

limits would apply despite the new firm's lack of presence in the syndication
market.
Even in instances where concerns about market power in the relevant
antitrust market appear to exist, ownership limits defined as a percentage of a
network's schedule might be unable to address these concerns. For example, if
the 	networks 	can successfully 	predict 	which 	programs 	will 	make 	it 	into
syndication, a cap limiting network ownership to half of their current schedule
will not prevent the networks from taking ownership interest in all of the
programs that eventually make it into syndication. 38
In addition, strict structural limits may be improper even if they are
based on a properly defined antitrust market. 	Use of such rigid limits may
unnecessarily interfere with pro-competitive transactions. Traditional antitrust
analysis does recognize that a concentrated market structure is a necessary, but
not a sufficient, condition for the existence of market power. 	This approach
allows the authorities to take into account other factors, such as possible
~ The possibility that a 25% limit may not prevent the networks from
acquiring ownership rights in all programs that make it into syndication is
discussed 	in 	the 	Comments 	of 	the 	Program 	Producers 	and 	Distributors
Committee in Response to the Further Notice of Proposed Rulemaking, MM
Docket 90-162, November 21, 1990, p. 13. 	The following calculations suggest
that a 25% limit will be binding. 	Suppose the probability that a program is
renewed equals 24% after the first year, 72% after the second, 84% after the
third, and 76% after the fourth. 	See Owen and Wildman, Video Economics.
forthcoming Harvard University Press, 1991, Table 4-8, p. 4-34. 	Using these
numbers, the probability that a show makes it into its fourth year as a on-
network prime time series (and thus into syndication) is 	14%. 	Under the
unrealistic assumptions that the networks know, ex-ante, which programs will
make it into syndication and that all programs are cancelled after the fifth
year, the networks, in order to control all of these programs, would, in any
given year have to have an ownership interest in approximately three out of
twenty first year shows, three out of the four shows that made it into the second
year, all three shows that made it into their third and fourth years, and both
shows that made it into their fifth year. 	The implies that the network would
have to take an ownership interest in over 40% of their current schedule (much
greater than the 25% suggested in the example contained in the comments of the
Program Producers and Distributors Committee). 	Under the more realistic
assumptions 	that 	the 	networks 	are 	uncertain 	about 	which shows 	will 	be
successful, and that shows may last more than five years, this percentage will
have to be even higher.
15

efficiencies, that could make a proposed transaction, even one that would result
in high combined market shares, on balance procompetitive.s9
For these reasons, we believe competition would best be served by
addressing 	instances 	of 	alleged 	monopolization 	through 	application 	of
conventional antitrust enforcement powers. fO Under such a system, it would not
be necessary to limit any network to ownership of a maximum percentage of
its prime-time schedule. 	Neither would it be necessary to place limits on in-
house production. 	At most, we would suggest that any structural limits be
enumerated solely in the form of non-binding guidelines or policy statements.
(iiJ 	Limits on Backwards Vertical Integration by the Networks
The FNPRM seeks comment on an option that would limit the amount
of in-house programming done by the networks. 	Adoption of such an option
would reimpose a condition contained in the Department of Justice consent
S9 See Purpose and Underlying Policy Assumptions, Section I of the U. S.
Department of Justice Merger Guidelines, supra note 34. 	With respect to
competition 	policy, 	use 	of 	traditional 	antitrust 	enforcement 	and 	market
definition would allow the FCC to bypass the issue of defining a "network"
and to avoid considering special waivers for "emerging networks". 	See the
FNPRM, supra note 2, Section VII. For earlier decisions on emerging networks,
see Christian Broadcasting Network. Inc. 87 F.C.C. 2d. 1076 (1981), and the ruling
on the original Fox petition to reopen BC Docket 82-345, January 30, 1990. Such
an approach would base any antitrust or regulatory interventions upon the
showing that a firm or group of firms would likely exercise market power
rather than basing such decisions on the contractual structure of the firm. 	For
the FCC's current definition of a network see footnote 14, supra.
fO See the FNPRM, supra note 2, items 16-18. 	In their 1983 comments, the
Department of Justice concluded that "the Department is not confident that
the antitrust laws can be relied upon as the most effective tool for ensuring
against possible anticompetitive practices in this area." 	See Comments of the
U. S. Department of Justice In the Matter of Amendment of 47 C.F.R. § 73.658(j),
the Financial Interest Rule, BC Docket No. 82-345, January 26, 1983, pp. 39-41.
In 	their 	latest 	comment, 	however, 	the 	Department, 	cites 	changes 	in 	the
marketplace and seems to have concluded that the antitrust laws may be
sufficient to deter anticompetitive behavior by the networks. See Comments of
the U. S. Department of Justice In the Matter of Evaluation of the Syndication
and Financial Interest Rule, :MM Docket No. 90-162, June 14, 1990, p. 34.
16

decrees that expired on November 30, 1990. 41 Vertical integration by the
networks into programming brings up two distinct policy issues. 42 	The first
issue is the effect that limits on vertical integration have on efficiency, both in
general and under the assumption that the networks possess monopsony power.
In our earlier comment, we found that limits on vertical integration may
decrease 	efficiency 	generally. 	and 	may 	increase 	the 	welfare 	losses 	from
monopsony. 	The second issue is the effect that limits on vertical integration
have on the distribution of rents between program producers and the networks.
The redistribution of rents, in and of itself. raises no separate efficiency issue,
. and lies outside the scope of this comment.
In our earlier comment, we examined. in general terms, the relationship
between vertical integration and economic welfare. 	In that comment, we
showed that vertical integration would likely increase the efficiency with which
programs are produced and distributed, and would likely increase programming
output.48 	We showed that vertical integration can 	improve efficiency by
mitigating 	problems 	of 	opportunism 	in 	contractual 	relationships 	where
transaction-specific 	assets 	are 	present. 	With 	respect 	to 	the 	problem 	of
monopsony. we showed that, to the extent the networks collectively exercise
monopsony power (and existing evidence does not support such a claim), vertical
41 See 5 Trade Reg. Rep., (CCH) at 50.766 (1980) [ABC Decree], 1980-81
Trade Cases at 63,594 [CBS Decree]. and 1978-1 Trade Cases, at 61,855 [NBC
Decree].
42 In addition to the issues discussed in this section, limits on in-house
production may indirectly limit the ability of the networks to acquire market
power in the sale of "off-network" programs. However. this issue was discussed
in the previous section. and any potential problems can be addressed directly by
focusing on network holdings of syndicated programs rather than focusing on
how the programs were produced. 	Another argument is that limiting in-house
production can indirectly limit the extent to which networks unfairly favor
programs in which they own a financial interest. 	The issue of favoritism is
discussed generally in Section IV.B.3(i). infra.
48 See the FTC staff comment, supra note 4. 	For a similar analysis, see the
DO] comment, supra note 40. Section III A. 1.
17

integration may reduce any welfare losses attributable to monopsony power.
Thus, 	limits on 	network 	in-house 	production can exacerbate, 	rather than
diminish, any welfare losses stemming from any existing network monopsony
power. 44
In general, regulations that limit the extent to which a firm in any
industry can vertically integrate focus upon vertical integration or vertical
restraints as the cause of market power. 	Economic analysis suggests that such
a focus on the vertical relationship is probably misplaced. If no market power
exists at either vertically related stage, vertical integration or vertical restraints
cannot create market power. 	And even if one of the parties does possess
horizontal market power, focusing on the source of the horizontal market power
would lead to more appropriate policy rules. 46 Given that vertical integration,
per se, is unlikely to cause problems associated with market power, and given
the plausible efficiency effects of vertical integration, we conclude that no
compelling case exists to reimpose limitations on in-house programming by the
networks. 46
The FNPRM also asks whether the expiration of the limitations on in-
44 See the FTC staff comment, supra note 4, pp. 19-22.
46 In commenting on proposals to prohibit gasoline refiners from engaging
in the retail sale of gasoline, the staff of the FTC concluded that existing
antitrust 	laws 	would 	"address 	possible 	anticompetitive 	practices 	more
effectively than would legislation restricting new entry by potential competitors
and regulating contractual relationships between suppliers and purchasers of
gasoline." 	See Prepared statement of R. Rowe, Director of Litigation, Bureau
of Competition, Federal Trade Commission, before the Joint Subcommittee
Studying Divorcement of the Virginia Senate and House of Delegates, October
23, 1990. See also letters from R. Rowe to A. Diamonstein, Chairman, General
Laws Committee, House of Delegates, Commonwealth of Virginia, March 2,
1990, 	and 	to 	D. 	E. 	Bosley, 	Representative, 	House 	of 	Representatives,
Commonwealth of Massachusetts, April 9, 1990.
46 Since the welfare effects of vertical restraints are ambiguous even when
horizontal market power exists, and since plausible efficiencies exist for such
relationships, the antitrust law uses a rule of reason analysis instead of per se
rules to analyze certain non-price vertical relationships.
18

house production will directly or indirectly (by interfering with the Prime Time
Access 	Rule 	(PT AR» 	reduce 	diversity.47 	A 	rule 	that 	limits 	in-house
programming will certainly cause programming to be produced by parties other
than the networks. However, given that the networks still have complete choice
over which programs they will broadcast, it is not clear whether changing who
produces network shows will increase or decrease the diversity of network
programming.
With respect to the distributional consequences of vertical integration,
we noted in our earlier comment that allowing a network to integrate vertically
may 	result 	in 	reduced 	profits 	for 	the 	program 	producers 	who 	remain
independent. 	Thus, the rules may cause a transfer of rents from networks to
producers. 	While our earlier comments did not directly address whether the
rules should be used to transfer rents from the networks to producers, they
noted that from an efficiency standpoint such transfers may only be achieved
at a substantial cost. 48
3. 	The Restrictions on Network Ownership of Control Rights.
A third set of possible ownership restrictions involve allowing the
networks to acquire passive financial interests in but not control rights over
syndicated programs. Possible restrictions include direct regulation of network
decisions to prevent the networks from favoring programs in which they took
or held an ownership interest, direct regulation to prevent the anticompetitive
warehousing of programs, and limiting the networks' ownership of syndication
47 The PT AR limits network affiliates in the top fifty markets to carrying
no more than three hours of network supplied programming or off-network
programming during the four-hour-Iong prime time period.
48 The Department of Justice has suggested that it may not be appropriate
to use the rules to transfer rents between the networks and the producers absent
significant adverse effects on program production. They note in their comment
that "if the transfers involve primarily the distribution of rents 	between
producers and networks, the issue is not an appropriate subject of governmental
intervention." 	See the DOJ comments, supra note 40, pp. 27-28.
19

rights to a minority (non-controlling) position. We examine these options below.
(i) Anti-Discrimination Regulations and Favoritism
The FCC has solicited comment on regulations that would ensure that
networks were not discriminating against programs in which they do not have
an ownership interest. 	As noted in our previous comments. empirical analysis
suggests that. prior to enactment of the rules, the networks did not favor
programs 	in 	which 	they 	held 	an 	ownership 	or 	financial 	interest. 	This
observation is consistent with the hypothesis that an unconstrained network
would be less likely to renew (or otherwise favor) programs in which it has a
financial interest if these shows tend to be more risky (Le., more likely to be
unsuccessful).49
In 	practice, 	any 	regulation 	designed 	to 	prevent 	"favoritism" 	or
"discrimination" would pose real risks. For example, a simple quota mechanism
that required equal treatment (e.g .• renewal rates) for owned and nonowned
programs that did not take into account underlying differences in the types of
shows could result in a network inefficiently basing its ownership and renewal
decisions upon compliance with the rule rather than upon sound business
judgement.
A more complex 	regulatory system which 	attempted 	to distinguish
efficient from inefficient favoritism would entail substantial regulatory costs
and could well become a regulatory morass. 	As noted in the FNPRM, anti-
discrimination regulation that attempted to be sensitive to efficiency concerns
49 See Crandall. "The Economic Effect of Television Network Program
Ownership. 14 J. L. & Econ. 385 (I971). We suggest that the favoritism issue be
analyzed using the vertical restraints approach discussed above. That approach
showed that if neither party possesses horizontal market power. "favoritism"
cannot create market power where it did not exist previously. Further. even if
one of the parties does possess horizontal market power, the focus on the
vertical relationship is probably misplaced: focusing on the source of horizontal
market power would lead to more appropriate policy rules.
20

would require government oversight over almost all network decisions. 5o We do
not think that it would be "feasible for the federal government to be involved
in conduct that inherently involves basic business and subjective judgments."51
Such micro-management by a regulatory agency would likely impose significant
burdens on the. networks and taxpayers. 	Moreover, producers of cancelled
programs 	could 	be expected 	to petition 	the 	regulatory agency 	that 	their
cancellations were the result of illegal "favoritism" rather than sound business
judgement. Studies of the transportation and health care industries show that
significant inefficiencies can be fostered when private parties can appeal for
regulatory relief whenever decisions fall against them. 52 One need look at no
more than at the vast amount of government and private resources used in this
proceeding to get an idea of the likelihood that such "rent seeking" behavior will
occur.
(ij) 	Anti-Warehousing Regulation
In addition to the structural limitations mentioned above, the FNPRM
contains two additional regulatory options designed to prevent the networks
frqm anticompetitively warehousing syndicated programming in which they
own a financial interest. 	The first would directly regulate warehousing by
forcing the networks to sell off -network programs on a "commercially timely"
60 Such decisions would include, for example, the terms of sale of network
owned 	off-network 	programming 	to 	network 	affiliates, and 	the 	renewal,
scheduling, and promotion of shows during their network run.
61 See the FNPRM, supra note 2, Section II, item 15.
62 For example, several studies of the trucking industry indicate 	that
allowing incumbents to use the regulatory process to delay or prevent entry by
potential competitors leads to higher shipping rates. See Owen, Deregulation in
the Trucking Industry, FTC Bureau of Economics Issues Paper (May 1988) and
the cites therein; and Winston, et al .. The Economic Effects of Surface Freight
Deregulation. The Brookings Institution (1990). Similar effects have been shown
to arise in 	health care markets when incumbent providers use regulatory
processes to impede entry of competitors. 	See Sherman, The Effect of State
Certificate of Need Laws on Hospital Costs: An Economic Policy Analysis. FTC
Bureau of Economics Staff Report (January 1988).
21

basis. The second would reduce the potential for anticompetitive warehousing
by limiting networks to a minority (non-controlling) ownership interest.
(aJ 	Direct Regulation of Warehousing
The FNPRM contains a option to directly prevent the networks from
warehousing programs. Such regulation would require the regulatory agency to
scrutinize network syndication decisions and intervene when it decided that a
network failed to market a syndicated program on a "commercially timely" basis.
In addition, the regulatory agency would have to scrutinize network pricing
decisions to insure that de facto availability was not being denied via an
artificially high price. That is, any anti-warehousing regulation would appear
also to require some form of price regulation.
As mentioned above, requiring a regulatory agency to regulate the
private decisions of firms can lead to significant inefficiencies. 	For example,
any attempt by the FCC to regulate price would likely lead 	independent
television stations to lodge numerous complaints about network pricing of
individual programs, thereby forcing the FCC to arbitrate a large number of
bargaining disputes over what constitutes a "fair" price. 	The incentive for
private parties to use such a regulatory pricing system to advance their private
goals rather than to promote competition may result in costs that approximate
the economic value of the rents generated by the productive activity being
regulated. 53
(bJ 	Limitation of Ownership to a Minority Interest
Any network's ability to "warehouse" programs anticompetitively can also
be restricted by limiting the networks to a minority interest in any given
program. Such a limitation would prevent the networks from acquiring control
63 See Posner, "The Social Costs of Monopoly and Regulation, 83 J. Pol. Econ.
807 (1975), and Baumol and Ordover, "Use of Antitrust to Subvert Competition,"
28 J. L. & Econ. 247 (1985).
22

rights to a program.54 By keeping the networks from acquiring control rights,
the financial sacrifice involved in warehousing the program to keep it off the
market could not occur without the consent of the majority partner. 	Unless the
majority partner (the program producer) can be induced to make a decision to
inappropriately hold his program off the market, a decision that would not be
in his own interest, warehousing would be unlikely to occur.
Relative to direct regulation of warehousing, the minority interest
limitation is likely to entail lower enforcement and rent seeking costs. Instead
of relying on complaints by interested parties to a regulatory agency, the
minority interest limitation avoids warehousing by relying on the incentive of
the majority party to make a decision that is in its own interest (i.e .. to syndicate
the program on a commercially timely basis).
(c) 	The Relative Merits of the Anti-Warehousing Options
We note that limiting warehousing by placing a cap on the networks'
ownership share of programs, by limiting the networks to a minority ownership
position, 	and 	by 	regulating 	warehousing 	directly 	should 	be 	viewed 	as
substitutes. 	That is, each of these mechanisms could be used to limit the
networks' ability to warehouse syndicated programs. 	Thus, it is unnecessary
to impose more than one of these options to address warehousing concerns. 	In
addition, the options are not perfect substitutes. The highest costs are likely to
be imposed through direct regulation.
Moreover, we continue to believe that a compelling case for anti-
warehousing regulation does not exist. 	There is no evidence that a necessary
64 A large body of literature has emphasized the separate value of control
rights in a firm. 	For example, in cases where multiple classes of stock have
been issued, the stock possessing the superior voting rights commands a premium
over the stock with inferior voting rights. 	See e.g .. Easterbrook and Fischel,
"Voting in Corporate Law," 26 J. L. & Econ. 395 (1983); Lease, McConnell and
Mikkelson, "The Market Value of Control in Publicly-Traded Corporations," II
J. Fin. Econ. 79 (1982); and Levy, "Economic Evaluation of Voting Power of
Common Stock," 38 J. of Fin. 79 (1982).
23

condition for the networks to act as monopolists in the sale of syndicated
programming, i.e., that "newly-produced off-network" programs constitute a
relevant antitrust market, is satisfied. Absent this condition, the likelihood of
the exercise of market power is smal1. 55 	In addition, evidence of network
behavior prior to and after enactment of the Fin-Syn rules suggests that the
potential for anticompetitive warehousing is small. 56 To the extent that any
of the anti-warehousing options were modelled after those suggested in the 1983
Department of Justice Comments, we note that the Department's latest comment
drops its support for such a safeguard because the changed marketplace makes
the assumption of network market power insupportable. 67 Finally, to the extent
55 This statement applies both to the networks' ability to anticompetitively
warehouse programs and to their ability to impose a "financial interest tax" on
program producers. 	In both of these theories, it is the marginal program (and
not 	popular programs) that will be 	warehoused. 	As noted 	in our earlier
comment, even if popular shows reaching the end of their network runs, and
older, off-network shows compete in different antitrust markets, the large stock
of older, off-network programs already available for syndication is likely to be
a close substitute for and compete in the same antitrust market as a marginally
profitable, newly-produced off-network program. See the FTC staff comment,
-&upra note 4, p. 33.
56 For a discussion of the networks' behavior prior to enactment of the rules,
see the FTC staff comment, supra note 4, pp. 25-26. In addition to the economic
warehousing theories, which suggest that the marginal programs would be
warehoused, the independent television stations, in their comments, suggest that
the networks would, in the absence of the rule, warehouse the best shows (e.g.,
Cosby, 	Cheers). 	See 	Further Comments 	of the 	Association of Independent
Television Stations. Inc., MM Docket No. 90-162, November 21, 1990. 	However,
the networks' behavior subsequent to imposition of the rules suggest that this
outcome is remote. 	See the FTC staff comment, id, pp. 26-27. 	If warehousing
of the most popular shows is a profitable strategy, we would expect to observe
the networks choosing to purchase the exclusivity rights while the show was still
running on the network. 	In addition, we would also expect to observe the
networks and their affiliates outbidding the independent television stations for
the syndication rights to off-network shows (and broadcasting these shows in
the early morning hours) immediately after the show ended its network run. In
general, the networks have chosen not to purchase exclusive rights to the most
popular shows that are still in first-run production for network exhibition, and
independent 	stations 	have 	outbid 	the 	network 	owned 	and 	operated 	and
affiliated stations for newly-produced off-network shows. 	See Appendix B of
the Association of Independent Television Stations comment, id.
57 See the Department of Justice comments, supra note 40, pp. 33-34.
24

that these options were intended to mitigate the theoretical problems raised in
the economic analysis presented by the Coalition to Preserve the Financial
Interest and Syndication Rules, we note that the possibility of warehousing has
been significantly downplayed in the Coalition's economic analysis, and that
neither the direct anti-warehousing regulations nor limiting the networks to a
minority interest would successfully prevent the anticompetitive use of the
"financial interest tax".58
v. 	Concluding Remarks
This lengthy proceeding has been punctuated by the wide gulf between
the major networks, which vigorously advocate complete repeal of the Fin-Syn
Rules, and the program producers, who argue that retention of the rules is
critical to the continued health of the television industry. 	The FNPRM has
asked for comment on several "compromise" options. 	While compromise is in
many situations an effective mechanism for settlement of disputes, in this
situation a compromise may lead to a result that is less desirable than either
complete elimination or complete retention of the rules. 	Our analysis of these
options lead us to continue to believe that the best course for the FCC is to
repeal completely the existing Fin-Syn rules.
68 Both the Department of Justice and the staff of the Federal Trade
Commission found that the potential was remote for anticompetitive harm from
the "financial interest tax." 	See the FTC staff comment, supra note 4, and the
Reply Comments of the United States Department of Justice, MM Docket 90-162,
October 5, 1990.
25