When Federal Communications Commission chairman Michael Powell described his agency’s partial deregulation of media outlet ownership restrictions June 2 as “modest, albeit very significant changes,” few seemed to share his sentiment. The Newspaper Association of America, a newspaper trade group, saluted the FCC for loosening the “regulatory shackles” that have prevented newspapers from owning TV stations in their home market. At the same time, several members of Congress saw something more dangerous in the rules changes; Sen. Olympia J. Snowe, a Maine Republican, said that deregulation “will undermine the basic tenets of democracy”.


Will deregulation be great for the media business, terrible for democracy, or does it represent merely a modest – but significant – change? The analysis of two Wharton media experts suggests that Powell’s somewhat paradoxical formulation may be right on target.


Business and public policy professor Gerald Faulhaber, who served as the FCC’s chief economist in 2000-2001, shares Powell’s assessment that the rules changes will have a modest effect. He predicts that the controversial deregulatory action is likely to have little impact on either the structure of the media industry or on the number of voices to which people are exposed. “It’s not going to be a big thing,” says Faulhaber.


The June 2 actions changed many media ownership ground rules. The FCC raised the national ownership cap by a single owner from a 35% share of U.S. TV households to a 45% share. Locally, one company may own two stations in a single market, but only one of these stations can be among the top four in ratings. In markets with 18 or more TV stations, a company may now own three TV stations, but only one of these stations can be among the top four.


Common ownership across media outlets is also restricted by size. In the smallest markets, those with three or fewer TV stations, no cross-ownership will be permitted among TV, radio and newspapers. In larger markets, companies will be allowed to buy at least one additional outlet.


Faulhaber charges that loosening some of the long-standing restrictions against one owner controlling multiple media outlets in a single market is unlikely to substantially reduce the diversity of voices available in that market. Unlike the period when the rules were written, consumers now have many alternative sources for information, he says. “Turn on your cable, turn on your satellite and you’ve got hundreds of channels. People have talked about localism in television. In Philadelphia I’ve got more local news than I can possibly stand,” he says, noting that local news programs are featured on seven different stations.


Media Substitution

Philadelphia’s experience is not unusual. Analysts at Forrester Research, a Cambridge, Mass. technology research firm, note that in 1960, the average media consumer could choose from six television stations, 4,500 magazines, and 18 radio stations. “Today,” write researchers Chris Charron and Josh Bernoff, “the average American can choose from more than 100 TV channels, 18,000 magazines, dozens of radio stations, 20 million web sites and 2,400 Internet radio stations.”


Would it matter if a few of those broadcast outlets consolidated or joined forces with a local newspaper? Faulhaber doubts it. “I don’t see that the Republic will fall [as a result of the new FCC rules] … It’s a pretty mild, pretty incremental kind of a move.” For all the talk surrounding this issue, he adds, few people have actually analyzed the impact of loosening the restrictions. Instead, they prefer to “jump up and down waving their arms and saying terrible things will happen, the sky is falling.”


One researcher who has indirectly tried to answer the question is Wharton business and public policy professor Joel Waldfogel. In a paper commissioned by the FCC and submitted in 2002, Waldfogel looked at the degree to which consumers substituted one form of media for another – a question that few researchers had asked before. “Researchers and policy makers have devoted significant attention to whether advertising in one medium is a substitute for advertising in another, but there little research (to my knowledge) on whether information provided through one medium serves as a substitute for information provided through another,” he wrote in the paper, titled “Consumer Substitution among Media.”


After analyzing a variety of data on the consumption of all kinds of mass media, Waldfogel found that, on the whole, there was a high degree of consumer substitution among different forms of mass communication – meaning that if consumers don’t like what they see on TV, for instance, they will look at the Internet instead.


Why does the answer matter? The reason is that traditional FCC regulations were predicated to an extent on the idea that regulations were needed to prevent too much market power from being concentrated in too few hands. If various mediums actually compete with each other, then the basis for regulation would need to be reconsidered. “If consumers substitute information across media, then the market for information may extend across media, raising questions about regulation of outlets within media,” Waldfogel wrote.


But there is one important caveat: Waldfogel found that media substitution may come at some cost to civic participation: “… substitution is not apparently so complete that the effects of changes in one medium are offset by changes in another to leave civic behavior unchanged.”


In earlier research on media consumption patterns, Waldfogel had found that what one read or listened to appears to have an impact on civic activity. For example, he found a negative correlation between New York Times readership and participation in local elections. Among African-Americans, he also found a positive correlation between black voting rates and the presence of black-targeted radio stations.


‘Vacuuming Up’ Radio Stations

In economic terms, Faulhaber predicts that the impact of deregulation will be fairly limited. While opponents of the FCC’s move say they fear creating “another Clear Channel” – referring to the 1,225-station, $21-billion radio giant that grew following passage of the Telecommunications Act of 1996 – Faulhaber believes such massive consolidation is unlikely. Telecommunications policy experts generally see the extent to which radio has consolidated as an accident, he says, and many experts believe the opportunity was the result of a drafting mistake by congressional staffers, not deliberate policy. No one intended to create a regulatory landscape in which a single company could “just vacuum up a bunch of radio stations,” Faulhaber says.


One indication of the eventual impact may be how the market has reacted to the changes. Following the 1996 act, radio station values continued the nearly straight-line climb they had begun in the early 1990s, says Kathy McCoy, an analyst at Kagan World Media, a broadcast media sales consultancy. According to data collected by Kagan World Media, the cash-flow multiples at which FM radio stations sold climbed between 1995 and 2000 from an average of 10.9 to a high of 14.


Earlier this spring, the mid-market television station began heating up in advance of the long-anticipated FCC action. Jeff Ferry, senior vice president with GE media and communications finance group in Atlanta, says that interest seemed to be growing in advance of the new rules. Ferry, whose unit is a provider of financing products for private equity investors and media companies trying to acquire TV stations, says his group was seeing significantly more activity in mid-market TV station financing. “Our deal flow has increased and the number of M&A transactions we’re seeing and hearing about in the market has picked up as well,” he notes.


However, Ferry did not anticipate any price climbs after the announcement. And he cautions that a variety of non-regulatory phenomena made TV stations difficult to value right now – ranging from the impact of such ad-skipping technologies as TiVO to the lack of a good base year from which to estimate future revenues.


Prior to the FCC announcement, Owen Van Essen, president of Dirks Van Essen & Murray, a Santa Fe-based newspaper brokerage, predicted that ending the newspaper cross-ownership ban would be unlikely to result in the kind of feeding frenzy that hit the radio market after the 1996 Telecommunications Act, because the business rationale for cross-ownership of newspapers and television stations is still unclear. “If the synergies are hazy – you think this is a good thing, but you can’t really quantify it – it’s not going to drive the multiples,” he says.