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A new wave of megamergers could be in store for the media sector. During oral arguments last week, a three-judge panel of the U.S. Court of Appeals for the D.C. Circuit expressed deep skepticism about federal rules that limit broadcast networks’ ownership of local television stations and that bar cable providers from owning an in-market television station. Analysts said both rules have artificially suppressed dealmaking in the media sector and their repeal would lead to a quick round of consolidation. “These are probably the most important cases for media deal flow ever,” Legg Mason Wood Walker Inc. analyst Blair Levin said. Adding to the import of the deliberations are two items on the Federal Communications Commission Thursday meeting agenda. One item is a proposed rule that could eliminate a ban on owning a television station and newspaper in the same market. The other would drop restrictions on how much self-produced content a cable company may offer on its system and would raise or eliminate a cap on the percent of households any one cable company may serve. If adopted, that would clear the way for cable operators to buy cable networks. At the appeals court hearing, experts said they saw virtually no chance that the judges would uphold the FCC’s network or cable and broadcast rules. Rather, they said, the issue is whether the court would void the rules outright or send them back to the FCC for reconsideration. “There is a very strong possibility that the rules will be remanded at the very least,” Prudential Securities Inc. analyst Susan A. Lynner said. Either option would represent a victory for media conglomerates. An outright rejection of the rules would permit companies to merge immediately without regard for the ownership caps. Sending the rules back to the FCC likely would mean media companies will have to face some type of ownership restriction. But FCC Chairman Michael Powell, a President Bush appointee, has been very critical of the ownership caps, and he is expected to raise them significantly if forced to re-address the issue. “Given this commission, that means the rules will be changed,” Levin said. A central question is how high the FCC would set the household cap. Levin predicts that Powell would prefer setting a high ceiling if the court raises serious questions about the legality of the rules. Overturning or expanding the network cap would put scores of television stations in play as NBC, CBS, FOX and ABC look to expand their holdings. As networks grow, they will have more sway over television affiliates. To counter that, affiliate groups such as Paxson Communications Corp. are expected to go on their own buying binge. “You either will have to get bigger or sell out,” Levin said. On the cable side, eliminating the rule would open scores of opportunities. For instance, Walt Disney Co. could buy Cox Communications Inc.’s cable assets or AOL-Time Warner Inc. could buy General Electric Co., Levin said. It also would eliminate questions about whether News Corp. could legally buy DirecTV Inc. Bringing the network suit was News Corp., Viacom Inc. and GE, which respectively own the Fox, CBS and NBC networks. They argued that the 1996 Telecommunications Act requires the FCC to formally establish every two years that a ban on network ownership of stations that reach more than 35 percent of households is still needed. Absent that finding, the rule was supposed to be repealed. The FCC conducted its two-year review in 1998, but issued what the networks considered an inadequate justification for retaining the rule. They sued, asking the appeals court to void the cap because the FCC failed to justify its retention. They also argued it violated the First Amendment by limiting networks to communicate with only 35 percent of the population. In defending the rule, Robert Long, who represented the National Association of Broadcasters, said the 35 percent cap is essential to maintaining the two-tier system of networks and affiliates. “It would be breathtaking for this court to vacate that rule,” he said. FCC attorney C. Grey Pash Jr. argued that the rule is constitutional because the Supreme Court has said that not everyone has a right to use the airways. “I don’t see any serious constitutional challenges here,” he told the court. The cable suit was brought by Time Warner Entertainment Co., a unit of AOL-Time Warner. It raised many of the same procedural and constitutional issues as the network suit, which is why they were consolidated into a single case. Speaking after the court arguments, former FCC Commissioner Susan Ness said she hoped the court would not void the rules. “If the rules are eliminated, realistically the commission will have an extremely difficult time even on a case-by-case basis of restricting ownership,” said Ness, who is now teaching at the University of Pennsylvania. “Once it permits ownership configurations to take place, that is a precedent. The rules would be shaped by the mergers.” The appeals court panel consisted of Judges Douglas H. Ginsburg, Harry T. Edwards and David B. Sentelle. It is expected to issue its opinion in several months. Copyright (c)2001 TDD, LLC. All rights reserved.

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