On April 21, the Federal Communications Commission (“FCC” or “Commission”) granted a petition for reconsideration of an order it issued last year abolishing the Ultra High Frequency (“UHF”) discount. By granting the petition, the Commission is reinstating the UHF discount, at least temporarily. The Commission reinstated the discount on a party-line vote with Chairman Pai and Commissioner O’Rielly support reinstatement and Commissioner Clyburn opposing it.
The 32-year-old UHF discount attributes only 50 percent of a Designated Market Area’s (“DMA”) population to a UHF station. This is important because the FCC’s rules generally prohibit a commercial television broadcast station owner from having an interest in stations with an aggregate national audience exceeding 39 percent (“national television ownership cap”). Thus, the owner of a UHF station gets a discount on the national audience cap because a UHF station’s population coverage counts as half of a VHF (“Very High Frequency”) station in the same market.
The discount is an artifact of analog broadcast technology. At the time of the discount’s creation, the broadcast signal from a UHF station was weaker, reached a smaller over-the-air audience, and cost more to build and operate than a VHF station. However, since the digital television transition, the technical difference between UHF and VHF stations no longer exists, a point on which all Commissioners agree. Additionally, the shift of audiences from over-the-air to cable subscription or over-the-top consumption has further eroded the rationale behind the UHF discount.
While Pai and O’Rielly agree that the UHF discount is no longer necessary, they objected to the Commission’s abolition of the discount last year. Chairman Pai argued that the discount is inextricably linked to national television ownership cap. Therefore, according to Pai, the Commission cannot adjust the UHF discount without considering how its elimination would impact the national television ownership cap; otherwise, the Commission would effectively be tightening the ownership cap for a UHF station owner without appropriately explaining the need to adjust the ownership cap.
Commissioner O’Rielly agrees with Pai’s position that the national television ownership cap and the UHF discount are interconnected; however, O’Rielly further believes that the ownership cap was fixed by Congress in a 2004 Act directing the Commission to set the ownership cap at 39 percent. Therefore, according to O’Rielly, the Commission cannot adjust the ownership cap and, by extension, it cannot eliminate the UHF discount because elimination of the discount would effectively change the cap. Despite O’Rielly’s belief that the Commission does not have the authority to change the national television ownership cap or the UHF discount, Pai has already announced his intention to start a proceeding to review the national television ownership cap, including the UHF discount, later this year.
More importantly for broadcasters, the FCC’s decision to reinstate the UHF discount may prompt a buying spree in the near-term. Buyers would likely be owners of already large station groups attempting to expand their national audience coverage under the existing ownership cap before the Commission’s new proceeding possibly eliminating the UHF discount a second time. These station owners likely expect that stations owned at the time of any future elimination of the discount would be grandfathered under the old rules, as stations were when the FCC removed the discount last year. However, it is worth noting that, in considering the national television ownership cap along with the UHF discount, the Commission could relax the ownership cap. This is a possibility, given Pai’s general deregulatory stance and his stated opinion that the video industry has undergone significant change (due to the rise of over-the-top video in particular) since the Commission last revised the national television ownership cap.
If you have any questions about the UHF discount, the national television ownership cap, or how the Commission’s television ownership rules might impact you, please contact Nate Hardy at njh@commlawgroup.com or Seth Williams at slw@commlawgroup.com.
