Week In Review: Ajit Pai Wants To Do Away With The FCC’s Net Neutrality Rules … And The 39% Ownership Rule … And the UHF Cap

1. Ajit Pai Wants To Do Away With The FCC’s Net Neutrality Rules

FCC Commissioner Ajit Pai announced that he was planning to roll back all of the Obama Era Net Neutrality laws and the internet collectively freaked out, as pro-net neutrality messages flooded Twitter, Facebook, Instagram, Snapchat and YouTube.

Why It Matters

Net neutrality (or in this, case, the lack thereof) is not an unequivocably bad thing. There's an argument to be made that in a competitive marketplace, there would be some companies that adhered to the principles of net neutrality and treated all sites equally, and others that provided fast lanes for sites that would pay, passing some of that payment along to consumers in the form of lower prices,  along with a market for both.

Unfortunately, and above all, critically, that sort of free market does not exist in the United States. We have monopoly conditions in over half the country and duopolies everywhere else. What’s more, there’s little chance of that ever changing, given the incredibly high cost of installing wire-based broadband. (Verizon, for example, spent over $5 billion just to install FIOS in the upscale suburbs of the Northeast and Los Angeles.)

That means we are at the mercy of one player in each market and if that player turns out to be the proverbial “bad actor”, using the lack of net neutrality rules to essentially blackmail companies into paying for fast lanes and/or quashing any new competitors, we're screwed.

The GAFA Piece

It’s been suggested that one good reason to do away with net neutrality is that it empowers the MVPDs as they and push back against GAFA—Google, Amazon, Facebook and Apple—all of whom rely on MVPD broadband to provide them with a distribution platform. That may be true, but it’s a not enough of a reason to do away with net neutrality, given the current lack of a free market for broadband access. And while a Google that brought you broadband in addition to everything else  would be the poster child for antitrust legislation, giving the MVPDs the power to charge Google for fast lane access doesn’t solve anything, particularly if that power can be used to shut down any up and coming Google competitors. In many ways, the absence of net neutrality seems like a gift to the GAFA companies, as it essentially reinforces their market dominating positions.

The FCC vs The FTC Piece

As we had explained a few months back, the legal issues with the FCC and net neutrality center around the nature of regulatory agencies like the FCC and the FTC, and that fact that their roles and enforcement powers are not clearly laid out anywhere.

It also stems from a difference in the way the FCC and the FTC look at their roles. The FCC has traditionally viewed their job to be that of “Commissioner”—they set up rules and regulations for the often unruly world of American media, providing strict guidelines that benefit all players (especially consumers) and keep everything on the up and up.

The FTC, on the other hand, has seen their role as one of “referee”, handling individual cases and complaints on an as needed basis, but not promulgating broad-reaching rules that sound a lot like legislation.

Solving For Pai

If we unpack what Commissioner Pai seems to be saying, it’s that the FCC does not have the authority to issue broad reaching rules like those around net neutrality because there have not yet been any cases where a company is claiming to have been harmed by a lack of net neutrality, e.g., it is not the role of the FCC to issue proactive rulings—that’s Congress’s job. He’s then saying that if someone feels they are being harmed by improper broadband allocation (e.g., the lack of net neutrality) that’s a commerce issue, and as such, it should be adjudicated by the FTC. In Pai's world, Congress should be the ones putting net neutrality laws on the books—not the FCC.

That’s all well and good except for two things: the aforementioned monopoly scenario and the fact that Congress is generally far too tech-inept to actually craft any sort of meaningful legislation around net neutrality.

What You Need To Do About It

If you’re an MVPD, you might want to start by doing a little celebration dance—this is a big win for you. Just be aware however, that any bad actions on your part (and that includes even slightly bad actions as well as debatable one) will lead to a huge public relations disaster. MVPDs have been improving their image as of late but the public’s memory is not short. Keep everything on the up and up, as Comcast and Charter have promised to do, and everything should be fine.  And watch out for 5G. While it’s still about a year away, it could well be the competition you don’t have now, and that could change everything.

If you’re a network with an OTT app, think long and hard before you pay for any sort of “fast lane.” The internet is a vast and open space and not being in the fast lane doesn’t mean you’re in the slow lane, it just means you’re not in the fast lane, which, given the vastness of the internet, may not necessarily be any faster than other lanes. (Got that?)

If you’re Congress, it’s really time you got on the stick and wrote some actual legislation around net neutrality. We get that it’s tough in that many of you don’t understand the issues or the technology. But if you were smart enough to get elected, you’re smart enough to find someone who can explain it to you so that you can have an informed opinion. (And yes, we’re most definitely giving Congress the benefit of the doubt here.)

2.  … And The 39% Ownership Rule … And the UHF Cap

Not content to just blow up net neutrality, Pai also moved to eliminate prior FCC regulations around the number of stations that any one company can own, while reinstating a companion regulation that only counts UHF stations 50% towards that cap.

As we discussed in our two-part series about local TV, the 39% ownership cap (no single owner can reach more than 39% of the total audience) was put in place back in the day to prevent the big three TV networks from buying up all the independent local stations and dominating the media.

Back in pre-cable days, reception on UHF (ultra high frequency) stations was extremely spotty and so their viewership numbers were counted as half that of VHF (very high frequency) stations. (For those of you old enough to remember, VHF, which consisted of channels 2 through 13, was on the main dial, while UHF, channels 14 and above, was on a separate dial.)

With the advent of cable, however, dial position and reception no longer mattered, as over 85% of Americans had some form of pay-TV. Thus the FCC did away with the 50% rule.

Why It Matters

Sinclair.

That’s the elephant in the room on several of Pai’s recent moves, particularly these two. Sinclair is looking to buy Tribune media, and according to most counts, the resulting entity will be over the 39% mark, which means they’ll have to sell off some stations. With the 50% rule back, that should no longer be the case.

There are many reasons the industry is unhappy about the Sinclair deal and Sinclair in general. There’s the fear that letting large station groups buy up independent local stations creates unfair competition for the networks by creating groups that are almost as large and powerful, but not governed by all the same rules and regulations. There’s the fear that Sinclair, whose management is very right wing might set up an all-news station to the right of Fox to promote its own agenda, and the fear that local broadcast is an outdated technology whose continued existence only serves to slow down innovation in the industry in general.

None of those fears are completely unfounded.

What You Need To Do About It

Pai’s move is not a fait accompli—it’s just a proposal to his fellow commissioners to schedule a review— though given the GOP majority on the FCC, it’s likely he will get his way on this.

If you’re an MVPD, you may be concerned because TIP, the local ad buying service that Sinclair, Tribune, Nextstar and Tegna are creating might actually prove to be competition for your local buying dollars.

If you’re a broadcast network, you’ll really want to be concerned because this can create unfair competition, even steal away many of your affiliates if Sinclair ever decides it wants to be a full-on network.

If you’re an advertiser, this could give you yet another way to reach a targeted local audience, particularly on broadcast channels. That should prove a real boon to advertisers looking to reach older audiences in particular.

If you're Congress, you need to write some legislation on this because claiming that UHF stations only count for 50% of VHF stations is a joke given that pay television still has an over 80% penetration rate.If you're the Department of Justice, you'll need to figure out how to reconcile the "no" position on AT&T/Time Warner with a potential "yes" position on Sinclair/Tribune.Good luck with that last one.