NOTICE ********************************************************* NOTICE ********************************************************* This document was originally prepared in Word Perfect. If the original document contained-- * Footnotes * Boldface & Italics --this information is missing in this version The document format (spacing, margins, tabs, etc.) is changed too. If you need the complete document, download the Word Perfect version. For information about downloading documents (FTP) see file how2ftp. File how2ftp (.txt & .wp) is in directory \pub\Public_Notices\Miscellaneous. ***************************************************************** ******** FOR FCC RECORD ONLY $//Report and Order, Prime Time Access Rule, MM Dock. 94-123, FCC 95-314//$ $/73.658(k), Prime Time Access Rule/$ FCC 95-314 Before the FEDERAL COMMUNICATIONS COMMISSION Washington, D.C. In re) ) Review of the Prime Time ) MM Docket No. 94-123 Access Rule, Section 73.658(k) of the ) Commission's Rules ) REPORT AND ORDER Adopted: July 28, 1995; Released: July 31, 1995 By the Commission: Commissioner Barrett concurring and issuing a statement; Commissioner Chong issuing a statement. Table of Contents Paragraph I. Introduction 1 II. Background 5 A. The Structure of the Industry 5 B. The History of PTAR11 C. The Notice and the Positions of the Parties 14 III. The Framework for Assessing the Continuing Need for PTAR 18 IV. The Networks and Their Affiliates Do Not Dominate Markets Relevant to PTAR 23 A. Video Programming Distribution26 B. The Video Programming Production Market 32 C. The National Advertising Market 37 V. The Costs of PTAR39 VI. Analyzing The Public Interest Need For PTAR 46 A. Increasing Opportunities for Independent Programmers 46 B. Fostering the Growth of Independent Stations and New Networks 64 C. Reducing Network Ability to Dictate Affiliate Programming Choices 103 VII. Summary of Findings and Transition 113 VIII. Administrative Matters 126 IX. Ordering Clauses 131 Appendices I. INTRODUCTION 1. The Commission's Prime Time Access Rule ("PTAR") generally prohibits network- affiliated television stations in the top 50 television markets ("Top 50 Market Affiliates") from broadcasting more than three hours of network programs (the "network restriction") or former network programs (the "off-network restriction") during the four prime time viewing hours (i.e., 7 to 11 p.m. Eastern and Pacific times; 6 to 10 p.m. Central and Mountain times). The rule exempts certain types of programming (e.g., runovers of live sporting events, special news, documentary and children's programming, and certain sports and network programming of a special nature) which are not counted toward the three hours of network programming. PTAR was promulgated in 1970 in response to a concern that the three major television networks -- ABC, CBS and NBC -- dominated the program production market, controlled much of the video fare presented to the public, and inhibited the development of competing program sources. The Commission believed that PTAR would increase the level of competition in program production, reduce the networks' control over their affiliates' programming decisions, and thereby increase the diversity of programs available to the public. PTAR also came to be viewed as a means of promoting the growth of independent stations in that they did not have to compete with Top 50 Market Affiliates in acquiring off-network programs to air during the access period. 2. On October 20, 1994, the Commission adopted a Notice of Proposed Rule Making ("Notice") in this docket to conduct an overall review of the continuing need for PTAR given the profound changes that have occurred in the television industry since 1970. As we stated in the Notice, inherent in our regulatory mandate is the continuing responsibility to review our rules and policies to determine whether, in light of prevailing market conditions, such rules and policies continue to serve the public interest. In response to the Notice, we received a substantial number of comments from interested parties, including economic and empirical analyses of the effects of repealing or retaining the rule. 3. Based on this record, we conclude that PTAR should be extinguished. The three major networks do not dominate the markets relevant to PTAR. There are large numbers of sellers and buyers of video programming. Entry, even by small businesses, is relatively easy. There are a substantially greater number of broadcast programming outlets today than when PTAR was adopted in 1970 due to the growth in numbers of independent stations. In addition, nonbroadcast media have proliferated. Viewers can choose from program offerings on cable, so-called "wireless" cable, satellite television systems, and VCRs. Under these market conditions, PTAR is no longer needed to promote the development of non-network sources of television programming. We also find, given these market conditions, and the record before us, that the rule is not warranted as a means of promoting the growth of independent stations and new networks, or of safeguarding affiliate autonomy. Indeed, the rule generates costs and inefficiencies that are not now offset by substantial, if any, benefits. 4. We thus find that the public interest warrants the repeal of PTAR. In scheduling repeal of the rule, we believe a one-year transition period is appropriate to provide parties time to adjust their programming strategies and business arrangements prior to the elimination of a regulatory regime that has been in place for 25 years. We consequently will make repeal of PTAR effective August 30, 1996. II. BACKGROUND A. The Structure of the Industry 5. We begin by summarizing briefly how the market for the purchase and sale of television programs operates. Television stations obtain programming for delivery to their viewers in a variety of ways. First, stations that affiliate with a television network obtain an entire package or schedule of programming directly from their network. This network "feed" is delivered to affiliated stations via satellite. Affiliated stations then broadcast the network programming to their local audiences. Some of the network feed is comprised of programs produced in-house by the network, such as the nightly national news and some entertainment programming. Much of the network feed, however, consists of programs produced by independent program production companies, with the network acting as a broker between these suppliers and its affiliated stations. 6. Affiliated television stations also program portions of the broadcast day independently of their network. They air locally originated programming, primarily local news, public affairs, and sports programming. They also obtain programming from suppliers called "syndicators," entities that sell programming to television stations, primarily on an individual basis. In contrast to a network feed which supplies a schedule of network programming pursuant to an agreement between the network and a station, a syndicator licenses programs for exhibition on a station-by-station, program-by-program basis. 7. Each of the original three major networks, ABC, CBS, and NBC, has over two hundred affiliates nationwide. (Each of the networks also owns and operates a number of stations throughout the country.) They each reach 99 percent of U.S. television households. The Fox Broadcasting Company has developed as a fourth network, with over 150 affiliated stations (as well as a number of its own "owned and operated" stations). (Fox also has over 40 secondary broadcast affiliates throughout the country.) The percentage of U. S. television households capable of receiving Fox network programming is 97 percent as of February 1995. 8. Recently, two new networks have been launched. The United Paramount Network ("UPN"), owned by subsidiaries of Chris-Craft Industries, Inc., began service on January 16, 1995, with 96 affiliates. UPN had 67 percent coverage through primary affiliates and an additional 16 percent coverage through secondary affiliations for a total coverage of 83 percent. A recent report indicates that UPN has added nine new affiliates -- three primary and six secondary -- to increase their audience reach to 86.5 percent, including coverage by primary affiliates of 73 percent. WB, affiliated with Warner Brothers (which, in turn, is owned by Time Warner), began broadcasting on January 11, 1995, with 47 affiliates and superstation WGN. WB has a national reach of 78 percent, with 18 percent of this reach achieved through cable delivery on WGN. Neither Fox, UPN, nor WB, however, falls within the definition of "network" for purposes of PTAR. None offers more than fifteen hours of prime time programming per week, a prerequisite for a "network" as defined for purposes of the PTAR rules. 9. There are now over 450 local commercial broadcast stations that are not affiliated with the ABC, CBS, or NBC networks. While these stations have traditionally been called "independent" stations, approximately 300 of these commercial stations are now affiliated with and obtain several hours of prime-time programming from the Fox, UPN, or WB networks. Approximately 150 of these stations are affiliated with Fox. Some of these stations have dual affiliations. In addition to airing this network programming, independent stations air some locally originated programming. Much of their programming, however, is obtained from program producers or syndicators. These programs include movies previously shown in theaters, television series previously aired on network affiliates (i.e., off-network programs such as reruns of The Cosby Show), and series produced for first-run viewing on the independent stations (e.g., Star Trek: The Next Generation). 10. PTAR affects the market for programming in several ways. First, it has created an "access period" from 7 to 8 p.m. Eastern and Pacific times (from 6 to 7 p.m. Central and Mountain Times) during which ABC, CBS, and NBC affiliates in the top-50 markets air non- network programming. PTAR thus affects the programming seen by viewers of the Top 50 Market Affiliates, and the affiliates' advertising revenues from air time sold during this programming. Second, PTAR increases the demand for syndicated first-run programming by the Top 50 Market Affiliates, given that they must turn to non-network programming during the access hour. Third, by precluding the Top 50 Market Affiliates from showing off-network programs in the access period, PTAR also effectively reserves a supply of popular off-network programming for purchase by independent stations and affiliates of Fox, UPN, and WB in these markets. B. The History of PTAR 11. PTAR was originally adopted in 1970, in conjunction with the Commission's financial interest and syndication ("fin/syn") rules. At the time, the networks were viewed as dominating the television marketplace. The Commission believed that this "modest action [would] provide healthy impetus to the development of independent program sources, with concomitant benefits in an increased supply of programs for independent (and, indeed, affiliated) stations." The Commission also expressed its hope that diversity of program ideas would be encouraged by limiting the networks' ability to influence programming during a portion of prime time. PTAR has also been seen as promoting the growth of independent stations and new networks. 12. PTAR was adopted as a structural mechanism to promote the Commission's diversity goals. The Commission has in the past adopted regulations that directly seek to promote certain types of programming as a means of providing greater viewpoint diversity. PTAR, in contrast, is an indirect effort to promote program diversity by seeking to increase the variety of program sources (i.e., source diversity), and, as some parties argue, program distributors (i.e., outlet diversity). The rule as originally conceived was not designed to promote a certain kind of speech, but to increase the variety of non-network speakers. The Commission subsequently carved out exceptions to the rule so that the rule would not prevent the broadcast during the access period of certain types of programming that served the public interest, e.g., children's programming and news and public affairs programming. 13. PTAR has been subject to criticism over the years. Several observers have faulted the rule for not achieving its goal of improving the television industry's economic structure and performance. In fact, they maintain that it has had the unintended effect of lowering the quality and diversity of access-period programming. The Commission itself was prompted to reexamine the need for the rule shortly after it was initially adopted. It ultimately retained the rule in a 1975 decision, rejecting a number of arguments for repeal by stating that it was "persuaded that the rule has not yet been fully tested." A number of Commissioners nonetheless expressed reservations about continuing the rule. In 1980, the Commission's Network Inquiry Special Staff concluded that PTAR should be repealed because, among other things, it did not appear to further any Commission policy to regulate in the public interest. The Commission did not, however, act on the staff's recommendation, and PTAR remains in force today. C. The Notice and the Positions of the Parties 14. Prompted by the criticism of the rule, and the dramatic changes in the television marketplace since the adoption of PTAR, several parties filed petitions with the Commission challenging the rule in whole or in part. In April 1994, the Commission solicited and received public comment on these filings. On October, 25, 1994, we issued the Notice to establish a more complete record, calling specifically for economic and empirical analysis of the continuing need, if any, for PTAR. 15. In response to the Notice, ABC, CBS, and NBC filed comments arguing that PTAR should be repealed in its entirety. An economic study of the rule prepared by Economists, Inc., on behalf of the networks was submitted in support of this position (the "EI Study"). According to these parties, the networks do not dominate video distribution or programming and do not have the leverage to dictate programming choices to their affiliates. Nor do they believe PTAR is necessary to foster the growth of independent programming or independent stations. In fact, they argue that PTAR distorts the programming market and has resulted in less diverse programming. According to these parties, PTAR deprives the networks and their affiliates from taking advantage of the efficiencies of network programming and has resulted in a loss of consumer welfare. A number of parties also maintain that PTAR is an unconstitutional abridgment of the First Amendment rights of the networks and their affiliates. 16. Representatives of the first-run syndication industry, independent television stations, and a number of public interest groups favor retention of the rule. They argue that it is constitutional. They fear that elimination or modification of PTAR will result in the re- emergence of the three network "funnel" for programming that the rule sought to eliminate. They claim that elimination or relaxation of PTAR will undermine affiliate autonomy. According to these parties, repeal would also cause significant harm to independent program producers and to independent stations. They also assert that repeal of PTAR will undermine the development of UPN and WB as new networks. On behalf of INTV, King World, and Viacom, The Law and Economics Consulting Group filed an economic study (the "LECG Study") to support retention of the rule. 17. Another set of parties -- the Coalition to Enhance Diversity (the "Coalition"), the Network Affiliated Stations Alliance ("NASA"), and Westinghouse Broadcasting Company -- argue that the off-network provision of PTAR should be repealed while the restriction on the number of hours of network programming (including first-run syndication by the networks) should be retained. According to these parties, the off-network provision unnecessarily limits the programming choices of the Top 50 Market Affiliates and discourages investment in network programming. The network restriction should be retained, however, because they believe that networks continue to have the power to dictate affiliate programming. An economic study prepared by Oliver Williamson and Glenn Woroch (the "WW Study") on behalf of the Coalition was filed in support of this position. The Motion Picture Association of America ("MPAA") filed comments arguing that the network restriction should be retained without addressing the off-network provision of PTAR. MPAA filed comments on behalf of Buena Vista Pictures Distribution, Metro-Goldwyn-Mayer, Paramount Pictures, Sony Pictures Entertainment, Universal City Studios, and Warner Brothers. III. THE FRAMEWORK FOR ASSESSING THE CONTINUING NEED FOR PTAR 18. The task before us is "to assess the extent to which [PTAR] serves the Commission's 'public interest' mandate to maximize consumer welfare, as opposed to merely protecting individual competitors in the communications industry." In assessing the continued efficacy of the rule, we need to examine whether under today's market conditions it is necessary to promote our competition and diversity goals. On the basis of the extensive record before us, we will evaluate the factual and economic assumptions underlying PTAR as well as the costs the rule may impose. As stated in the Notice, "the ultimate decision to retain, modify or eliminate the rule will turn on a weighing of its costs against its benefits." 19. Specifically, we assess the continuing need for PTAR as follows: First, we will evaluate whether the networks dominate the markets relevant to the rule, or would be likely to dominate them in the absence of PTAR. Second, we assess the costs imposed by the rule. Third, taking into account our findings regarding whether the networks dominate and the costs of the rule, we analyze whether the rule is necessary as a means of pursuing the benefits of fostering independent programming, promoting the growth of independent stations and new networks, and safeguarding affiliate autonomy. In particular, we assess whether PTAR provides public interest benefits by altering competitive opportunities in the following three ways: First, by carving out a portion of prime time to be used for non- network use, the rule made it easier for independent producers to sell their programming to Top 50 Market Affiliates. Second, the rule provided independent stations with more programming choices than affiliates in an effort to foster their growth and that of new networks. Third, the rule reduced the networks' role in dictating their affiliates' prime-time programming choices by forbidding Top 50 Market Affiliates from broadcasting more than three hours of network or off-network programming during prime time. 20. Examining the evidence taken from the record before us, we conclude that repeal of PTAR will not jeopardize the competition and diversity goals that prompted the Commission to adopt the rule in 1970. The networks and their affiliates do not dominate video programming distribution or the video programming production market and are unlikely to do so without PTAR. The record also indicates that PTAR is no longer warranted as a means of providing independent stations a competitive advantage. Moreover, repeal of the rule will not threaten the station base or jeopardize the further development of the new networks, WB and UPN. Finally, the record does not support the argument that affiliates need the rule to reduce the networks' asserted ability to control affiliate programming choices. 21. This conclusion is consistent with our 1993 decision to repeal the fin/syn rules, which was upheld on appeal by the U.S. Court of Appeals for the Seventh Circuit. We determined that repeal of the fin/syn rules was warranted given the increased competition facing the networks and the conditions in the television programming marketplace. These conditions included the decline in network audience share since the fin/syn rules were adopted, the increasing demand for television programming created by the emergence of the Fox network and cable networks and the growth of independent television stations, the intense competition among the three established networks for programming, and the increasing ability of first-run distribution to be a fully comparable alternative to network distribution for program producers. Based upon these findings we eliminated a number of the fin/syn rules immediately and set a timetable for repeal of the remainder. 22. Our review of PTAR raises many of the same diversity and competition issues that led us to repeal the fin/syn rules. As with the fin/syn rules, we conclude that PTAR is no longer warranted. We describe the basis for this conclusion in the following sections using the analytical framework outlined above and in the Notice. IV. THE NETWORKS AND THEIR AFFILIATES DO NOT DOMINATE MARKETS RELEVANT TO PTAR 23. The Commission's adoption of PTAR in 1970 was premised on a view that the three networks dominated television programming. The parties debate whether this remains true today. Proponents of the rule argue that the networks still dominate. Advocates of repeal argue that the networks do not dominate programming. Our analysis of the record leads us to conclude that neither the networks nor their affiliates dominate video programming distribution or the video programming production market. 24. A business can dominate a market, i.e., exercise undue market power, by acting alone or together with other businesses. An entity with a large enough market share, e.g., 90 percent or more, may be in a position to exercise undue market power acting alone. Alternatively, an entity may be able to exercise undue market power with other businesses if together their market shares form a large part of the market, i.e., the market is concentrated, and other factors such as barriers to entry are present. When a firm or group of firms dominate a market, the market will not operate efficiently. Regardless of whether the firms dominate as buyers or sellers of the product, the quantity of the product produced will be less than that which would be produced by a competitive market. 25. We will assess whether the three networks or their affiliates have undue market power in video programming distribution and the relevant video programming production and national television advertising markets by employing a two-step market power analysis: (1) Defining the Relevant Market -- First, we must identify both the product and geographic markets relevant to the operation of the rule. The relevant product market can be defined by determining the willingness and ability of consumers to switch from a product directly affected by the rule to another in response to a price increase, with all other product attributes (such as quality) being equal. To the extent consumers will switch between products based on such a price increase, the products are deemed substitutable, i.e., "reasonably interchangeable by consumers for the same purposes," and hence make up the product market. The relevant geographic market refers to the alternative and economic sources of supply to which buyers of these substitutable products can turn in the event of such a price increase. (2) Examining Evidence of Undue Market Power -- Second, we estimate and analyze the market's structure and its concentration, as an indication of the absence of undue market power. By market concentration, we refer to the extent to which one or more large firms may have significant shares of the relevant market. If the market is unconcentrated, we presume that the exercise of undue market power is not possible. If the market is concentrated, other market conditions, including barriers to entry, must be examined to determine if one or more firms can exercise undue market power. We have used this two-step market power analysis in reporting on the status of cable competition, in reconsidering the radio ownership rules, and more recently in seeking comment on revising our broadcast television ownership rules. A similar framework is also used in antitrust analysis. A. Video Programming Distribution 26. PTAR applies to ABC, CBS, and NBC affiliates in the Top 50 PTAR Markets. These networks and their affiliates display or "distribute" television programming to viewers and sell air time to customers seeking to advertise. In program distribution, networks and their affiliates compete with programs broadcast by independent stations. The list of economic substitutes for network broadcasts may also include cable programs, programs over satellite television systems, videocassette rentals, and other alternatives. For purposes of our review of PTAR, we will focus on program distribution comprising only broadcast television station operators and their networks. This is a conservative, perhaps overly narrow, approach given that a good case can be made that, from the viewers' perspectives, cable system operators inter alia are economically relevant alternative distributors of video programming. Since PTAR constrains the market activities of affiliates of the three major networks in the Top 50 PTAR Markets, our primary focus in this section is whether these network affiliates would be able to exercise undue market power in the delivery of video programming in their respective local markets. 27. Even with this narrow description of video programming distribution that is limited to the video programming offered by local broadcast stations, there are substantially more distribution outlets today than in 1970. The total number of commercial and non- commercial television stations has increased 78 percent, from 862 stations in 1970 to 1,532 stations as of January 1, 1995. The number of commercial independent stations (which rely mostly on syndicated programming, including for their prime-time schedules) has grown by almost 450 percent, from 82 in 1970, to over 450 in February 1994. Moreover, in 1970, the Top 50 PTAR Markets had 70 independent stations, or, on average, 1.4 per market. In 1994, the Top 50 PTAR Markets had 278 independent stations, or, on average, 5.6 per market. In short, in 1970, television viewers in the Top 50 PTAR Markets had access, on average, to 4.4 commercial VHF and UHF stations. By 1994, that number had more than doubled to 8.9. (Including noncommercial stations, the per market average again more than doubled from 5.7 to 11.6.) Hence, even without considering other potentially competitive media outlets, the number of competing stations in the markets subject to PTAR has increased very substantially. 28. The recent increases in the number of broadcast stations now provide more program outlets and a larger station base to support the development of new networks. In 1970 there were three national television networks. Today, Fox has developed as a fourth network. Two incipient networks -- UPN and WB -- were launched earlier this year. 29. It is thus clear that, in the Top 50 PTAR Markets, the three original networks and their affiliates face more competition for viewers than they did in 1970 or even in 1980. The effects of this competition are readily apparent in examining the networks' audience shares over the years. Looking at prime time alone, the time period when the networks' viewing shares are the highest, each network's average share of the prime time audience declined from a 31.1 viewing share during the 1971/72 season to a 20.2 share during the 1993/94 season, a loss of almost one-third of each network's audience. ABC, CBS, NBC, and Fox had individual 1993/94 prime-time audience shares of 20.1, 22.7, 17.8 and 11.4 percent, respectively. The Commission's calculation of affiliate audience shares in each of the Top 50 PTAR Markets is consistent with network audience shares nationally. No single network or network affiliate would seem to have the ability to dominate video programming distribution in any of these local markets. 30. Nor is it likely that affiliates in a local Top 50 PTAR Market would dominate as a group since video programming distribution is only moderately concentrated. In its 1993 decision setting a timetable for repeal of the fin/syn rules, the Commission stated that "inter- network competition for programming is 'intense.'" Nothing in the record before us calls this conclusion into doubt, as the networks continue to wage a ratings war that has only been heightened with the emergence of the Fox network. 31. We thus conclude that, even focussing narrowly on local broadcast video programming distribution, the three networks and their affiliates cannot singly or jointly dominate video program distribution in the Top 50 PTAR Markets. This is a strong conclusion because the inclusion of additional television alternatives such as cable, satellite systems, video dialtone, etc. would serve to make domination by the networks and their affiliates even less likely. B. The Video Programming Production Market 32. We begin to define the relevant video programming production market by focussing on the products produced by beneficiaries of PTAR. Entertainment series, news magazine shows, and game shows are examples of the programs sold by independent producers and syndicators of prime-time programs to network affiliates and independents. The list can be extended to include movies (whether for television, theatrical presentation, or cassette rental), sports programs, talk shows, news programming (local and national), musical variety, dramas, arts presentations, etc. Suppliers of these programs include not only those suppliers that actually are employed in a given year to produce programming for network prime time but also those producers willing and able to produce such programming in the event that market price increased above the competitive level. The list of suppliers will include television networks, independent syndicators, Hollywood movie studios, and international video producers. Buyers of such programming are not limited to television broadcasters but will include other purchasers of video programming such as cable networks and operators, direct broadcast satellite operators, videocassette distributers and, most recently, video programming affiliates of local telephone companies, which propose to offer video dialtone service. This market is "clearly national and perhaps international in scope, because television broadcasters obtain a large portion of their programs from national providers." 33. In looking for evidence of undue market power in the video programming production market, we first consider the demand side. Given the lack of concentration in video programming distribution, it should not be surprising to find that the demand side of the video programming production market shows no evidence that any single buyer or group of buyers exercises undue market power. Indeed, this is what we found in our fin/syn proceeding two years ago: We believe that the . . . evidence of purchasing patterns by Fox, cable networks, independent stations, and the three original broadcast networks themselves, demonstrates that the video marketplace has become more competitive with respect to the demand for programming. Moreover, as the number of program distributors, broadcast stations and cable services increases, the demand for programming will continue to grow, thereby providing producers with additional alternative buyers for their programming. Non- network program distributors already are beginning to purchase the quality programming previously sold only to the national networks. In this respect, we find that the market power of the networks vis-a-vis other purchasers of programming is limited. Moreover, inter-network competition serves as an additional constraint on any one network's ability to dictate terms in its overall dealings with the production community. Thus, we believe that a program producer that is not satisfied with the arrangement offered by a network has alternative purchasers for the product, and that the current market of alternative purchasers is sufficient to limit network market power over entertainment program acquisitions. 34. There is no evidence that since we issued our fin/syn decision market conditions have changed such that the networks exercise monopsony or oligopsony power in the video programming production market, i.e., that one (monopsony) or several firms (oligopsony) artificially restrict the consumption of programming and depress the market price paid for programming. Aside from the growth in the broadcast industry described above, there are nearly 150 national and regional cable networks, most of which transmit original, non- network programming. Also, other nonbroadcast video program distributors -- such as cable, wireless cable, and satellite services -- have grown. Finally, first-run syndicators are quite active as buyers (and sellers). According to the EI Study, in 1994 the video entertainment programming purchased by each of the three networks accounted for approximately 9.4 percent of aggregate expenditures on video programming in the United States, after taking into account distribution fees associated with syndicated programming and home videos. These market shares indicate that demand for video programming is not concentrated, and that the networks clearly cannot be said to exercise market power in the video programming production market, either individually or together. 35. The supply side of the video programming production market is no more concentrated than the demand side. The Staff of the Bureau of Economics of the Federal Trade Commission ("FTC Staff") presents data showing the market shares of leading network suppliers for the prime time of Fall, 1994, 1977, and 1970, respectively. In each year, they listed twenty suppliers. No single supplier in any of those years had a market share of as much as 20 percent. The markets were essentially unconcentrated. None of the suppliers, either acting alone or together, could exercise undue market power. Data provided by the EI Study and the LECG Study essentially confirm this conclusion. Moreover, comments filed by the Staff of the FTC's Bureau of Economics ("FTC Staff"), at 13, note that the minimum efficient scale of production in this market is low. Therefore, entry is not impeded by significantly high production costs. The FTC Staff also states that there are no other obvious impediments to entry and growth by new suppliers of programming. 36. We therefore conclude that no buyers or sellers, acting alone or together, are likely to be able to exercise undue market power in the video programming production market. In addition, entry barriers are low. In particular, it is unlikely that the three networks will be able to exercise market power in the video programming production market, either on the demand or supply side, if PTAR is repealed. 37. The WW Study argues that there is evidence of a trend towards increasing vertical integration by ABC, CBS, and NBC. It states that these three networks may be increasing their financial interests in program production and distribution. The WW Study points to the possibility that vertical integration is being driven by a "land rush" for the fixed supply of programming resources (e.g., film archives, experienced programming talent). According to WW, this poses the danger of foreclosing unintegrated producers from the program production market and deterring new entrants into the market. 38. We are not persuaded by this argument. The WW Study itself seems to cast doubt on the prospect that the vertical integration "trend" is actually deterring new entrants into the program production market: "At the moment, given the many alternative sources of programming and the many outlets for broadcasts, it is unlikely that any one firm will be able to amass such market power." In addition, our measures of market concentration in video programming distribution and production do not suggest that firms can exercise undue market power there. Entry also appears likely to be a constraint on firms attempting to dominate those markets. We also note greater integration is not in itself contrary to the public interest. Indeed, vertical integration can provide greater efficiencies and better service to the consumer. C. The National Television Advertising Market 37. LECG argues that "advertising rate dynamics [are] a superior indicator of the networks' market position" because the television industry is "the business of producing audiences for advertisers." The LECG Study asserts that the three networks dominate the advertising market, noting that the networks raised their nominal prime time advertising rates from 1980 through 1991 even though their prime time network audience share steadily declined throughout this period. An examination of nominal (i.e., unadjusted for the effects of inflation) advertising rates over time, however, tells little if anything about undue market power without controlling for a number of variables, especially inflation and increases in demand for advertising. In fact, the increases in rates LECG points to would appear to be readily explained by these two factors, rather than undue network market power. Furthermore, the record before us indicates that ABC, CBS, and NBC each has an average share of national television advertising revenues that has fallen by one-quarter from 19.1 percent in 1970 to 14.6 percent in 1993. The record further shows that even if the market is defined more narrowly as national television advertising less national spot sales, each network's share is less than 23 percent. Under the current record, then, LECG has not made a case that the networks' market shares in either market are sufficiently large to suggest that they could exercise undue market power either individually or acting together. 38. In any event, as the EI Supplementary Study, at 40-41, points out, PTAR was not adopted to address the structure or performance of the advertising industry. This is why the Notice did not explicitly seek information on television advertising markets. The Commission adopted PTAR due to concerns that the three networks dominated the production and delivery of television programming. Examination of video programming distribution and the video programming production market is thus directly relevant to whether PTAR is necessary under today's market conditions. We cannot say the same for the television advertising market, nor are we persuaded that PTAR is the appropriate mechanism for addressing the networks' role in these markets. V. THE COSTS OF PTAR 39. In assessing the continuing need for PTAR, we must take into account the costs the rule imposes on the networks, their affiliates, producers of network programming, television viewers, and the efficient functioning of the market. One obvious cost of the rule is that it restricts the programming choices of Top 50 Market Affiliates. They cannot air either network or off-network programming during the access period. While these affiliates urge the retention of the network restriction, they call for repeal of the off-network provision because it "now actually serves to frustrate the accomplishment of one of the rule's central objectives: namely, the maximization of programming choices for local licensees." The WW Study describes how the off-network restriction interferes with the smooth functioning of the network-affiliate relationship by raising the overall costs of network broadcasting. With PTAR in place, the affiliate must either make investments to produce programs itself, or it must purchase first-run programs from syndicators. In the latter case, the affiliate bears the transaction costs of establishing relationships with syndicators and independent programmers. In either case, the affiliate bears the added risk of how first-run programming will perform relative to known-to-be-popular network reruns. As a result of these higher costs, the total of net revenues to be shared among networks and affiliates is made smaller by PTAR. 40. PTAR harms not only networks and affiliates, but the producers of network programming. The off-network restriction has had the unintended effect of discouraging investment in prime-time programming. Producers rely to a great extent on their ability to sell reruns of their programs -- i.e., off-network programs -- to recoup their costs and to earn a profit. The license fee the networks pay for the right to air prime-time entertainment programs often does not cover the costs of producing these programs. According to the Coalition, in fact, the network license fee usually covers only 70 percent of the producer's costs, resulting in production deficits for network programming. The off-network restriction, however, diminishes producers' ability to recoup costs by artificially restraining the prices of off-network programming. It does so by eliminating the Top 50 Market Affiliates from the range of potential purchasers of this programming. By reducing demand, the prices for off- network shows are reduced. PTAR provides a corresponding subsidy to producers of first- run syndicated programs in the form of higher prices and to certain independent stations in the form of higher ratings. The Commission believes that PTAR produces costs and inefficiencies to viewers that are larger than the benefits, if any, of PTAR to viewers. 41. Reduced prices for off-network shows will naturally have the effect of lowering the return on network programming, thus reducing the quantity and quality of such programming that a non-PTAR market would otherwise produce. In this respect, television programs can be likened to durable goods. Like any durable good, restrictions on future availability and uses will reduce the value of the good. Program producers will be induced to reduce the quantity of programming they sell because PTAR reduces the size of the secondary market for those programs. This may result, as the WW Study says, in fewer episodes of each series. In some cases, there may be sufficiently few episodes that the series does not qualify for syndication. 42. We are persuaded by WW that by reducing the prices of off-network programming, PTAR's off-network restriction also tends to reduce the quality of prime-time series. WW assumes, as is conventional among economists, that the per-episode production cost of a series may be one measure of program quality. Focussing therefore on this single (and quantitative) measure of quality and not on program content per se for a given quantity of prime-time programming, an increase in quality will increase the series' incremental advertising revenue when the quality improvement increases the size of the series' audience. WW assumes also that the incremental cost of that quality increase remains unchanged. In these circumstances, programmers will spend more on program quality when PTAR's off- network restriction is eliminated because programmers can use that quality increase to expand audiences and advertising revenues. 43. In addition to the costs described above, PTAR as a whole prevents the networks and their affiliates from taking advantage of network efficiencies during the access hour. Networks can deliver large audiences to advertisers, which in turn allows the networks and their affiliates to provide higher cost programming that is quite popular among audiences during prime time. The EI Study argues that the loss of these efficiencies due to PTAR resulted in viewers turning off their televisions or watching less-preferred shows during the access period. This loss is an economic cost to society because PTAR thereby lowered the well-being or welfare of those viewers. EI estimates the monetary value of that welfare loss at more than $200 billion dollars. 44. PTAR proponents dispute this quantitative estimate. Indeed, the WW Study asserts that EI's estimated $200 billion welfare loss is not statistically distinguishable from zero. We disagree with WW's statistical analysis and reject its conclusion. However, the WW Study also asserts that, because EI's analysis rested upon a twenty-five year old study, it suffers from a number of flaws, e.g., it does not control for new market factors such as numerous and varied cable networks and widespread use of VCRs. Here, we agree with WW and are persuaded that the difference in viewers' valuations of affiliates programs and independents' programs are smaller now than in 1970. Indeed, one of the likely effects of growth in cable systems is to reduce viewers' valuations of over-the-air broadcast programming overall, thus tending to reduce the difference in viewers' valuations between affiliates' and independents' programs. Thus, we believe that the size of EI's estimated welfare loss, while not zero, is overstated. Whatever the correct figure is for the welfare losses due to PTAR, the Commission concludes that the economic costs of PTAR far exceed the rule's economic benefits. 45. We are persuaded that there are efficiency costs to retaining PTAR. PTAR does deprive the networks and their affiliates of the opportunity to take advantage of the efficiencies networks provide. The record does not provide reliable estimates of the size of the welfare loss to consumers due to PTAR. But it is safe to say that, by altering the normal functioning of the market, PTAR generally produces inefficiencies that impose significant costs on the consumer. This is particularly the case with respect to the off-network restriction. The logical connection between restricting the size of the market for network television programs as PTAR does and reduced investment (both quantitatively and qualitatively) in that programming is too clear to be ignored. VI. ANALYZING THE PUBLIC INTEREST NEED FOR PTAR A. Increasing Opportunities for Independent Programmers 46. PTAR's principal purpose was to promote source diversity by strengthening existing independent producers and encouraging entry of new producers. From an economic perspective, the Commission anticipated that the decrease in supply of programming available to affiliates (caused by PTAR's ban on network and off-network programming) would provide independent producers greater access to the prime-time schedules of the Top 50 Market Affiliates. Thus, the Commission predicted that the rule would increase the net amount of diverse programming available to the viewing public and induce the entry of new program suppliers into the market. 47. A number of parties argue that PTAR has failed to promote these goals. They point out that four companies -- Paramount, Warner Brothers, Fox, and King World -- distribute over 95 percent of the first-run syndicated programming aired during the PTAR access period. The first three are major Hollywood studios that have been major suppliers of prime time programming both before and after PTAR. King World is a new entrant to the market since PTAR's adoption, and in fact is the leading supplier of access period first-run programming. But its two most popular programs -- Wheel of Fortune and Jeopardy -- got their start as network programs and then went into first-run syndication. Putting aside the question of who distributes access period programming, opponents of the rule also argue that PTAR has failed to increase diversity in terms of who produces such programming. According to the EI Study, there are 38 percent fewer suppliers of prime time entertainment programs now than there were prior to PTAR. 48. Moreover, the rule has been criticized for actually lowering program quality and diversity. The Network Inquiry Special Staff commented in its 1980 report that PTAR "has failed to spawn network prime-time quality programs" such as the dramas, comedies, and documentaries provided by the networks to their affiliates during prime time. Rather, the great majority of first-run syndicated programming during the access period is made up of game shows and news magazine shows. Both these programming formats existed prior to PTAR and are available in other dayparts. Most of these programs are also "stripped," i.e., the same program airs each weekday night, with a different game, edition or episode shown each night. Two observers of the industry have recently stated that PTAR lowers program quality during the access period because it takes away "the tremendous economies of scale of networking whereby the network can spend more money to produce or acquire a program than a less widely distributed alternative and yet incur less cost per viewer in doing so. When one takes away the economies of scale, as does PTAR, one takes away the ability to create high-cost programming." 49. Without judging the quality of particular programs, we agree that PTAR, by eliminating network programming, may have resulted in the loss of efficiencies that the networks and their affiliates may have enjoyed in the absence of the rule. We note, however, that there are many variables that affect the number of program producers and program types in the market, with or without PTAR. It is also possible that the competitive advantage first- run producers gain in the access period from PTAR may help them finance first-run shows that air in other dayparts and thus leads to greater diversity in this respect. In fact, the syndication market as a whole has produced an increasing number of new first-run programs, growing from 45 first-run syndicated programs sold in 1970 to 250 in 1990. Nevertheless, we recognize the limits of regulatory efforts to promote program diversity, and realize that PTAR prevents the use of network efficiencies during the access hour. 50. Mindful of these issues, we turn to the critical question of whether PTAR is necessary today as a means of promoting the growth of independent programmers and source diversity. In answering this question, it is important to remember that in adopting PTAR, the Commission cautioned that it was not its intention "to carve out a competition free haven for syndicators" or "to smooth the path for existing syndicators." Rather, the central objective of the rule was to provide "opportunity . . . for the competitive development of alternate sources of television programs." 51. We no longer believe PTAR is necessary to provide this opportunity under today's market conditions. We reached a similar conclusion in eliminating the fin/syn rules' restriction on network acquisition of financial interest and syndication rights in network prime time entertainment programming. In reaching this conclusion, we dealt with the same source diversity concerns and stated that "[i]f profits are competitive, then the only reason to employ regulatory devices to protect producer profits is if we determined that, for some reason, the public required a greater array of producers than the market would normally bear." As in the fin/syn proceeding, "[n]o party . . . has provided any reasoned justification for such a result here." 52. None of the networks (or their affiliates) appear to exercise undue market power in video programming distribution, in the video programming production market, or, on the basis of the evidence before us here, in the national television advertising markets. They no longer can be viewed as a "funnel" or "filter" through which all independent programming must pass. As described above in Section IV.B., the dramatic increase in alternative outlets -- independent stations, the Fox, WB, and UPN networks, cable networks, and other nonbroadcast outlets -- has greatly increased the market opportunities for program suppliers. Moreover, the networks compete vigorously with each other in purchasing independent programming for distribution to their affiliates. They acquire from outside producers over 75 percent of the entertainment programs they distribute to affiliates. The healthy demand for programming created by all these competing outlets is demonstrated by the EI Study's identification of nearly 1,400 production companies producing shows that were either broadcast or carried on cable in 1994. 53. Repeal of PTAR will subject suppliers of first-run syndicated programming to greater competition during the access period. A Top 50 Market Affiliate may, for example, decide to acquire the rights to broadcast an off-network program during this period, or demand that the first-run syndicator lower its price to induce the station to carry its programming rather than off-network fare. This competition in today's marketplace can provide incentives to provide more innovative, higher quality programming, all of which benefits the consumer. 54. Repeal of PTAR will also eliminate the costs generated by the rule, which we have described in Section V. Most importantly, prices for off-network programming will no longer be artificially constrained, which we expect will encourage investment in the production of network programming. 55. Proponents of the rule have not provided any evidence to support their claims that this competition will "destroy the market for first-run non-network syndicated programming." To the contrary, the record indicates that first-run programming is quite popular. In 1994, 181 first-run syndicated programs were broadcast, and 18 of the 25 most popular syndicated programs were first-run. Satellite delivery is now available to non- network suppliers, reducing their distribution costs, previously a disadvantage compared to network distribution to affiliates. Indeed, we concluded in the fin/syn proceeding that "first- run increasingly is a fully comparable alternative to network distribution." 56. The record suggests that many Top 50 Market Affiliates may very well continue to broadcast first-run syndicated programming during the access hour even without PTAR. First-run programming often attracts larger audiences than off-network fare. Indeed, a number of the Top 50 Market Affiliates have recently made long-term commitments to renew first-run syndicated programming they presently carry even though they were aware of the Commission's review of PTAR. The performance of programs that formerly aired on the Fox network (which are not subject to the off-network restriction) also indicates that first-run programming can compete against off-network programs. According to the Coalition, "only four of the stations in the Top 50 markets that purchased the successful off-Fox show Married . . . With Children were ABC, CBS or NBC affiliates. In total, only 13 stations in the Top 50 markets selected off-Fox shows." 57. In addition, first-run syndicated programming makes up 76 percent of all access hour syndicated programming broadcast by network affiliates in markets 51-100 which are not subject to PTAR. This suggests that there will continue to be a healthy demand by network affiliates for first-run programming after the repeal of PTAR, including the top 50 markets. The LECG Study, however, argues that programming choices in non-PTAR markets cannot be used to predict the choices that would be made by the Top 50 Market Affiliates in the post- PTAR world because top 50 market purchases influence the choices in lower markets. According to LECG, first-run programming "may be more risky" because such programs "have the potential for higher ratings than off-network programs but they also have the potential for significantly lower ratings." Based on this assertion, LECG claims that "[t]he decision to air a first run syndicated program in the top 50 markets makes the choice of this program by an affiliate in a smaller market less risky since the top 50 market sales establish nationwide viability." LECG thus concludes that "it is wrong to assume that the pattern of carriage of programs on stations outside the top 50 markets can be used to predict post-PTAR clearances in all markets." 58. LECG is correct in that syndicated programs need to obtain clearances in a number of the largest markets to be successfully syndicated. But this does not mean we should discount completely the inferences that can be drawn from current buying patterns in non-PTAR markets. The success of first-run programs in these markets may have as much to do with factors other than PTAR's effect on the top-50 markets. As we have stated, and as LECG concedes, first-run programming often enjoys higher ratings than off-network shows. It may be more popular because it is, after all, new programming rather than reruns. Moreover, as the EI Study points out, first-run programming generally has lower overall production costs, allowing them to compete effectively against off-network programs even though the latter has recovered a portion of its production costs in the up-front market. We also note that a good number of syndicated programs have aired for quite some time and have established "nationwide viability," and thus would not face the problem LECG identifies even assuming it were valid. 59. To the extent off-network or network programming would displace first-run syndicated programs from the Top 50 Market Affiliates, first-run programs should be able to find a place on independent stations, not to mention other outlets such as cable. In such an event, independent stations will have an incentive to air first-run programming to counter-program the affiliate's programming; an independent station will be motivated to air, for example, such programs as Hard Copy in response to the affiliate who shows reruns of Cheers. Indeed, many independents already broadcast first-run programs in prime time opposite network broadcasts; among non-Fox independent stations in the top-50 markets, 39 percent of prime time hours were first-run syndication. 60. A number of PTAR proponents, citing the LECG Study, argue that repeal of PTAR will harm viewers because network affiliates will substitute less-popular but more profitable off-network programs for first-run shows. They argue that first-run syndicated programming is handicapped in competing with off-network programming because producers of first-run syndicated programs must recover all of their variable and development costs from the syndication market. In contrast, according to these parties, producers of off-network programs have already recovered much of their development costs through the first-run licensing fees they earn from the networks. Thus, off-network programs need only be priced to cover their variable costs and their unrecovered development costs. Affiliates will consequently replace more popular first-run syndicated programs with equally or less popular off-network programs because the latter result in greater profits because of their cost advantage. 61. We do not find this argument persuasive. As an initial matter, even assuming these parties are correct in their assertions, they have not identified a market failure or provided a justification for regulatory intervention. In a market economy, many goods do not get produced because the revenue they generate is insufficient to cover the costs of producing those goods. In any event, the record indicates that the costs of off-network shows, including unrecovered production costs, and the costs of first-run syndicated programming are comparable. As EI points out, according to LECG's own data, the average off-network syndicated program has unrecovered production costs of approximately $90,000 per episode. This is comparable to the per-episode production costs of the average first-run syndicated program, which LECG estimates at $70,000 to $100,000 per episode. The unrecovered production costs of off-network shows cannot be dismissed as "sunk costs," because producers have come to rely on off-network runs to recover the production deficits of these shows as well as failed network pilots and series and undoubtedly take them into account in deciding whether to produce a show in the first place. Moreover, the broadcast of off-network programming entails distribution costs as well as any residual payments and royalty costs that must be made when a show is successfully syndicated. Thus, off-network shows do not appear to have any cost or profit advantage relative to first-run syndicated programming. We consequently find no evidence that first-run programming suffers an inherent disadvantage relative to off-network programming that requires continuation of PTAR. 62. WW's reply comments also take issue with LECG's conclusions concerning the advantage of off-network programs over first-run syndication. First, they argue that LECG's economic theory is wrong. LECG's model assumes that program suppliers have only one buyer, a monopsonist. It also treats program sales by suppliers to broadcasters as one- time transactions. We agree with WW that neither of these assumptions by LECG is realistic. Relaxation of either assumption, argues WW, will result in equilibrium program prices that do not display an inherent cost advantage for off-network programs. WW shows, moreover, that even within LECG's static, monopsony framework, off-network distributors do not have an inherent cost disadvantage that would permit them to outbid first-run syndicators. 63. WW, in their reply comments, rebut LECG's argument by using the book publishing industry as an analogy. Expected revenues from new books must cover their development, production and distribution costs. Few new books are commercially successful. There is, of course, no PTAR-type rule in book publishing. Therefore, argues WW, according to LECG's theory, there should be a dearth of new book publishers or authors because they are unable to make money due to the many existing titles available as either new or used books. WW states that according to LECG's logic, this competition should hold book prices down to avoidable cost and make it impossible for new titles to recover their full costs; and asks how can one explain the thousands of new books written and published each year as well as the new book publishers entering the market each year. Just as a PTAR-type regulation is not necessary for book publishing, PTAR is no longer necessary to provide a competitive advantage to independent programmers for television. B. Fostering the Growth of Independent Stations and New Networks 64. The Commission's central purpose in adopting PTAR in 1970 was to promote the growth of independent program producers. It expressed the view that this would in turn benefit both affiliated and independent stations. "[T]his modest action will provide a healthy impetus to the development of independent program sources, with concomitant benefits in an increased supply of programs for independent (and, indeed, affiliated) stations. The entire development of UHF should be benefited." We conclude that today PTAR is no longer necessary to promote independent program sources. The record before us, as well as the decision in our fin/syn proceeding, shows that there is a healthy supply of independently produced programs available to the television industry. 65. Representatives of independent stations and one of the new networks, however, argue that PTAR continues to be necessary in providing independent stations with competitive advantages over competing network affiliates. One advantage is that independent stations in the top-50 markets have access to lower priced off-network programming, since Top 50 Market Affiliates cannot air this programming during the access hour. Another advantage is that under PTAR these Affiliates cannot compete against independent stations by running network programming during this time period. 66. INTV credits PTAR with having promoted the growth of independent stations, most of which are located in the UHF band. It claims that "independent television service would deteriorate materially if the rule or the off-network provision were repealed." Its comments focus primarily on the off-network provision, arguing that elimination of this aspect of the rule would force independent stations to pay more for off-network programming and possibly be outbid for it. According to INTV, this would reduce the ratings and revenues of independent stations, which would in turn "undermine and reduce their abilities to provide public interest programming," including news and public affairs programming. 67. Viacom argues that PTAR is necessary for the further development of the two newest networks, UPN and WB. According to Viacom, without a strong base of independent stations "and the audiences they attract during the prime time access hour, the new networks will never become strong, competitive media voices in the broadcast marketplace." WB and UPN were launched in January of this year, and are seeking to expand their programming schedules and affiliate base which is made up of primarily UHF stations. Viacom claims that "PTAR is vital to the financial health of UPN's independent station base, and may well mean the difference between economic viability and going dark for many of those UHF stations." Both INTV and Viacom support their arguments by pointing to the LECG Study which asserts that the repeal of PTAR will result in a severe drop in ratings for independent stations in both the access period and the adjacent prime-time period. WB, the other "new network," did not submit comments in response to the Notice arguing that PTAR is necessary for the success of the new networks. 68. ABC, CBS, and NBC, their affiliates, and the Coalition dispute these claims. They assert that independent stations and the new networks do not need the protections of PTAR, and that the rule merely provides an inequitable competitive advantage to these stations. In addition, Fox filed reply comments stating that, "[c]onsistent with its view that competition, rather than regulation, is the best servant of the public interest, [it] has no objection to repeal of the Prime Time Access Rule." 69. We have noted the importance of off-network programming to the access period ratings of independent stations. But the record does not conclusively show that repeal of either the off-network provision or the network restriction of PTAR will undo the growth of independent stations since the rule was adopted. Nor will repeal of the rule likely undermine the development of new broadcast networks, or otherwise harm the Commission's outlet diversity goals. 70. The number of independent television stations has grown by almost 450 percent since PTAR was adopted, from 82 stations in 1970 to over 450 today. We agree with INTV that "[n]o one may deny that independent television has grown and prospered since" adoption of the rule. One of the questions before us is, however, what will happen to independent television in today's marketplace if PTAR is repealed. The record indicates that advances in television design, the growth of cable penetration, and the growth in demand for television advertising all have strengthened independent television. As noted, independents also have a robust supply of programming to turn to under today's market conditions. The repeal of PTAR is unlikely to threaten these advancements. Nor is there sufficient basis in the record to conclude that repeal will so undermine the ratings and profits of independent stations that our outlet diversity goals will be implicated. It is likely that repeal of the rule will subject these stations to greater competition in acquiring off-network programming and in attracting audiences during the access hour and prime time. But there is not sufficient evidence in the record to support the claims that this competition will result in dramatic ratings declines and revenue losses to an extent that threatens the overall viability of independent stations and their ability to satisfy their public interest obligations. Relatedly, there is no reliable evidence to indicate that repeal of PTAR will jeopardize the station base of the new networks or threaten their further development. 71. We consequently conclude that PTAR is not warranted as a means of ensuring the growth of independent television stations or new networks. This is especially the case given the costs of the rule. The off-network provision discourages investment in network programming. Moreover, it is becoming increasingly inequitable to provide a competitive advantage to independent stations over network affiliates in today's marketplace. The networks and their affiliates, like independents, face growing competition from nonbroadcast media. 72. Having summarized our conclusion and the reasoning behind it, we now discuss our analysis in detail. We reached this conclusion by addressing three questions raised by the commenters: First, does the record show that the "UHF handicap" warrants affording independent stations a competitive advantage in the form of PTAR? Second, does the record demonstrate that PTAR is needed to support independent television stations' ratings and profitability and that repeal of PTAR would significantly harm outlet diversity? Third, does the record support the argument that the repeal of PTAR will frustrate the development of the new networks? We will discuss each question in turn. 1. The UHF Handicap 73. Proponents of the rule seek to justify PTAR by pointing to the signal reach disadvantage of UHF stations relative to VHF stations. They maintain that this "UHF handicap" places independent stations at a structural disadvantage since most of them are in the UHF band. Affiliates of the three major networks are predominantly VHF stations. 74. Our review of the record, however, as well as Commission findings in other proceedings, leads us to conclude that the UHF handicap has been reduced to some extent. First, Congress and the Commission have taken a number of steps over the years to ameliorate this handicap by requiring television equipment improvements. The Commission itself noted earlier this year: From a technical perspective, the ability of the UHF television service to compete against VHF service, however, has improved in the 24 years since the secondary affiliation rule was adopted. One major change occurred as a result of the Commission's invocation -- beginning in the 1970s -- of the authority it had been given under the All-Channel Receiver Act of 1962 to require not only that television receivers be capable of tuning comparability for VHF and UHF channels but that such television receivers provide a greater degree of tuning comparability for VHF and UHF channels. Pursuant to this authority, between 1970 and 1973, the Commission required television receivers to have more comparable tuning for UHF channels. In 1976, the Commission provided that any television receiver equipped with a VHF antenna must also have a UHF antenna, and in 1978 the Commission reduced the maximum allowable noise figure for television receivers. In 1982, the Commission modified the television all-channel requirements and recommended that information on improving UHF reception be disseminated to the public. Advances in television design and the role of cable carriage have decreased the gap between VHF and UHF stations. These developments substantially alleviated the technical disadvantages faced by UHF television receivers . . . . [Emphasis added.] 75. Second, the growth of cable has resulted in a reduction in the UHF handicap with respect to those viewers that subscribe to cable. The number of households subscribing to cable has grown from 4.5 million in 1970 to 60.5 million in 1994 -- 66.3 percent of U.S. television households. As the Commission's Office of Plans and Policy has observed, ". . . the growth of cable made possible the expansion in the number of broadcast television stations by increasing the potential audience for UHF stations." Indeed, the growth of independent stations over the years seems to track closely the growth in cable penetration. Nonetheless, the disparity between UHF and VHF remains for a portion of the now approximately one-third of viewers that do not subscribe to cable. 76. The EI Study submitted in this proceeding provides further evidence that cable growth has significantly reduced the UHF handicap. EI argues that cable has eliminated the UHF signal disadvantage. The EI Study updates an earlier study conducted by R. E. Park for the Commission in 1979. Park and the EI Study use a sample of cable systems in the Southeastern U. S. to test for the UHF handicap. Park used 1977/78 audience share data and found that VHF network affiliates had greater audience appeal than UHF independent stations. However, Park also found that UHF signals on cable had a much smaller handicap. EI replicates the Park study with data from 1993/94, finding that the handicap of UHF independents carried on cable has disappeared entirely. INTV challenges the conclusions drawn by the EI's study on a number of grounds, arguing that its suffers from selective sampling, anomalous results, and failure to distinguish between local and distant signals. After review of these arguments in Appendix B, we conclude that EI's study provides additional evidence that cable has reduced the UHF handicap. 77. We disagree with INTV that cable may not necessarily extend a UHF station's coverage to areas not already reached by the station's over-the-air signal. At present, local commercial broadcast stations generally are entitled to mandatory carriage on cable systems throughout their television market without regard to over-the-air signal coverage. Further, a broadcast station's inclusion within a particular television market is a reflection of where a station actually competes for viewers and revenues with other market-area stations. Retention or repeal of PTAR does not alter the must-carry status of any station. 78. However, although cable has reduced the UHF handicap, we understand that it may still affect some portion of viewers who are not cable subscribers. INTV argues that cable does not offset the UHF handicap for the one-third of viewers who are not cable subscribers. We think this may overstate somewhat the size of the broadcast audiences subject to any remaining UHF handicap. There are undoubtedly viewers who choose not to subscribe to cable because they can receive good quality over-the-air VHF and UHF signals and do not desire additional channels over cable. Indeed, as we have described, the number of viewers receiving good quality UHF signals has increased given non-cable factors such as improved receiver technology. We also note that cable penetration is quite high even among low-income viewers. According to the EI Study, at 8, "[i]n no income class is penetration less than 50 percent, except for those with incomes under $10,000. Even for that group penetration is 46 percent." Thus, the number of viewers who both receive poor UHF signals and cannot afford cable appears to be relatively low. 79. While the UHF disparity continues for some viewers, we do not think the public interest is served by tying PTAR to its complete elimination. The rule does not and cannot address the technical disparities that still exist between some stations. Moreover, the rule has never been tailored to the UHF/VHF distinction. Rather, PTAR provides a competitive advantage to independent stations by limiting the programming options available to Top 50 Market Affiliates, even in cases where the affected network affiliates are themselves UHF stations. We do not believe this is appropriate given today's market conditions and the costs imposed by the rule. The handicap has been reduced. Affiliates, like independents, are facing increased competition in the television marketplace from non-broadcast sources. We thus conclude that the UHF handicap that remains does not warrant continuation of PTAR. 80. The Commission reached a similar conclusion in eliminating its UHF impact policy from consideration in licensing proceedings. Under this policy, applications to initiate or improve VHF service were considered contrary to the public interest if the proposals threatened adverse economic impact on existing or potential UHF stations. The Commission found, in the context of licensing and allotment proceedings, that "the former disparities between the UHF and VHF services have been largely eliminated. This improvement has resulted from the continuing growth of the television market and Commission requirements for changes in television receiver designs that have reduced significantly the technical handicap of the UHF service." The Commission further observed that "the UHF service has become, by and large, a healthy and profitable sector of the television industry. . . . The large increase in the number of UHF television stations since the adoption of the UHF impact policy attests to the competitive health of the service." Given these findings, the Commission found that "it is no longer reasonable to assume that there is a public interest need to restrict competition" from VHF stations as a means of fostering the growth of UHF stations. 2. PTAR and the Ratings, Growth, and Profitability of Independent Television Stations 81. Introduction. Proponents of PTAR argue that independent stations are generally newer to the industry and less profitable than network affiliates. They claim that PTAR has helped ameliorate these disadvantages and has resulted in the growth of independent stations. According to this argument, PTAR has increased substantially the audience shares of independent stations during the prime time access hour compared to what their shares would be given the absence (or repeal) of PTAR. Higher ratings in the prime time access period also carries over into higher ratings in the hour following the access period. These parties argue that, because the prime time hours are typically the hours that contribute disproportionately to station revenues and profits, independent stations have become far more profitable than they would have been absent PTAR. This profitability, in turn, has made them attractive as potential affiliates for the newly developing networks. Thus PTAR has operated as an indirect, albeit significant, cause of the development of these new networks. Repeal of PTAR, according to these parties, will severely reduce independent station ratings during access and prime time periods, resulting in a drop in their revenues. They claim this will in turn undermine their ability to provide public interest programming, possibly lead to some stations "going dark," and "stunt the development" of the UPN and WB networks. 82. These arguments are based on an infant industry rationale for PTAR. Infant industry arguments in the United States go back at least as far as Alexander Hamilton, and arose as a justification for protecting new domestic industry from established foreign competitors. The infant industry theory would argue that protection for entrants, i.e., new firms, is needed so that they may be able to grow to a size sufficient to realize economies in their operations and, at that point, be able to compete with established firms. PTAR, by providing a competitive advantage to independent stations, promotes their growth, which in turn provides a stable station base for new networks. In other words, for any new broadcast networks to develop, there must be a base of successful independent stations. 83. We do not believe PTAR can be justified today on the basis of these infant industry arguments. Independent stations as a group can no longer be said to be in their infancy. Their numbers have grown dramatically in the 25 years since the adoption of PTAR. Their operations are, on average, profitable, and they have a ready supply of program sources. Moreover, the record indicates that much of the growth of independent stations may be unrelated to the rule. The increased demand for advertising appears to have contributed to the growth of independent stations. In addition, the reach of UHF signals has been extended by improvements in television transmitter and receiver equipment design. Click stop channel selectors (as opposed to the floating UHF dial on older televisions) for the UHF band and, more recently, remote controls to select channels have also strengthened the competitive position of independent stations. Moreover, as stated in the FTC Staff's comments, at 32, "[i]n all likelihood, it has been the growth of cable, more than any other factor, that has facilitated the entry of new commercial television stations, and the formation of new advertiser-supported broadcast television networks, such as Fox." 84. A number of PTAR proponents point out that cable has two effects on UHF stations. It improves signal quality but it also subjects UHF stations to competition from the additional channels available to a viewer shifting from over-the-air reception to a cable delivery system. This argument implicitly concedes that the UHF signal disadvantage is eliminated for cable consumers. In any event this increased competition is the result of a greater number of distribution outlets, which is entirely consistent with the Commission's diversity goals. We do not think it justifies providing independent stations a competitive advantage vis-a-vis PTAR Top 50 Market Affiliates when the latter, along with the networks, face the same competitive pressures from cable. 85. The record does not support the assertion that the repeal of PTAR will reverse the trends that led to the growth of independent stations. Nor is there sufficient support for the proposition that repeal of PTAR will significantly reduce independent stations' ratings and undermine these stations' profits as to affect their ability to provide public interest programming or otherwise implicate the Commission's outlet diversity concerns. 86. The Impact of PTAR on Ratings and Station Growth. Proponents of the rule rely on a regression analysis set forth in the LECG Study to support their claims regarding the importance of PTAR to independent stations. The LECG analysis attempts to demonstrate that the adoption of each of the two components of PTAR (the three hour network restriction and the off-network restriction) increased the ratings of independent stations. The same analysis also seeks to show that repealing PTAR will result in a 58 percent drop in access period ratings and in a carry-over 67 percent drop in the ratings for the first (following) prime-time hour for independent television stations. The study examines three periods of time: (1) the pre-PTAR years, 1966 through 1970; (2) the immediate post-PTAR years, 1971 through 1976 and 1979; and (3) recent post-PTAR years, 1987 and 1993. 87. The LECG Study's regression analysis reached these conclusions: þ PTAR had a positive and significant effect upon the growth of the number of independent stations in the long run, revealing the effect somewhere between 5 to 15 years after PTAR implementation. þ PTAR had an immediate and continuing effect on independent stations' ratings, increasing them significantly. The increase was smaller in the largest markets. PTAR actually reduced independents' ratings in New York. þ The estimated equations can be used to predict the effects of the repeal of PTAR in the period from 1995-2004. They assume that each of the top 30 markets continues to grow in size to the same extent it did as over the 1966-1993 period, and that cable penetration by market grows as it did from 1973-1993. For all programming periods, the repeal of PTAR will have a negative effect on the ratings of the average independent station in all markets over the 1995-2004 period. The size of the negative effect will vary over time and across markets, increasing in the smaller markets. For the access period, the repeal of PTAR will have a negative impact upon average station ratings for all but the largest market, New York City (where independent station ratings will increase). The size of the negative impact increases in the smaller markets. Because of the predicted effects of PTAR repeal on prime time ratings, and, LECG argues, because the access period generates a disproportionate share of total independent stations' profits, the repeal of PTAR will result in greatly reduced earnings for independent stations. 88. The WW and EI Studies are highly critical of the conclusions drawn by LECG's analysis and the methodology it used. We have reviewed the LECG Study carefully. Cognizant of the resources required to conduct such a large-scale study, we nonetheless are concerned with certain problems in LECG's analysis: þ LECG does not link its econometric model to an underlying conceptual model of behavior in the television industry. In other words, LECG does not provide a model that tells us how independents and affiliates would respond to changes in today's television marketplace. Without such a conceptual model, the econometric estimates of the equations in LECG's analysis cannot be linked to industry behavior so that Commission regulations such as PTAR can be analyzed. For example, if prices of off-network programming rise, would independents purchase less popular programming, or would they continue to purchase the same programming, albeit at higher prices? Without answering questions such as this, one cannot predict ratings changes. þ LECG uses its historical analysis of the effects of PTAR (based largely on data from the 1970s) to predict the effects of repealing PTAR today. This approach ignores the problem of hysteresis. Even if factor A caused certain changes in the past, there is no guarantee that removal of factor A in the future will reverse those changes. Technologies, markets and regulations have changed considerably since 1970. There is no reason to believe, as LECG seems to, that removal of PTAR will return us to the three-network broadcast television world of 1970. þ LECG's statistical methodology (the use of time trends) links changes in independent stations' ratings since 1970 to a single regulatory policy, PTAR. However, many non-PTAR changes in regulations have significantly ameliorated the UHF handicap. The Commission has discussed the numerous changes in regulations it has promulgated to reduce the UHF handicap. These changes are not included in LECG's model. As a consequence, we do not find the predictions of the model reliable. þ There are errors and gaps in LECG's datasets. For example, many of the independent stations included in the sample failed to meet Nielsen's minimum reporting standards and therefore exhibit zero reported ratings when their actual ratings were, while small, positive. þ There seem to be problems with LECG's specification of its equations and their estimation. Application to a sample of network affiliates in some cases shows that PTAR had no effect on ratings and in other cases showed that PTAR raised affiliate ratings, thereby casting doubt on the econometric specification itself. þ LECG's study reports point estimates for regression coefficients without confidence intervals, making it impossible to confirm that LECG's predicted ratings declines for independent stations are statistically distinguishable from zero. 89. As a result of these and other problems, discussed in Appendix C, we conclude that the LECG Study, and the arguments advanced by parties based on this study, do not provide sufficient evidence to demonstrate that repeal of PTAR will result in significant ratings declines for independent stations. For the same reasons, the study does not provide reliable evidence that PTAR has as a historical matter increased independent station ratings. LECG's analysis simply interprets the decreased ratings differential between independent and affiliated stations as wholly due to the adoption of PTAR. With respect to LECG's calculated drop in ratings differential, LECG does not adjust for any other potentially important variables such as the growth of cable, changes in advertising markets, changes in business activity, and other regulatory changes in the 1966-1976 period such as government mandated improvements in television equipment design that ameliorated the UHF handicap. 90. Indeed, WW employed LECG's econometric model to provide evidence directly at odds with arguments advanced by the rule's proponents. In their reply comments, WW states that their re-analysis of the LECG Study's 1993 data in fact shows that the UHF handicap has been eliminated. When LECG's empirical analysis of the off-network restriction is adjusted to compare the effects of PTAR on established (or experienced) versus marginal (newer or younger) independent stations, WW finds that established stations in 1970 were the principal recipients of the benefits of PTAR. However, given the larger audiences made possible by current cable penetration, younger independent stations overcome initial rating problems and achieve any beneficial effects on ratings due to PTAR in less than three years of operation. Even under the LECG model, therefore, according to the Coalition, independent stations have had, in the twenty-five years since PTAR, more than enough time to mature. 91. We further observe that while independent stations will be forced to pay competitive prices for off-network programming in the absence of PTAR, they will not necessarily be outbid for such programming. As noted, in markets 51-100, 76 percent of syndicated programs aired by network affiliates is first-run rather than off-network. Moreover, in 1993, two of the top five off-network programs broadcast in markets 51-100 were aired more often on independent stations than on affiliates. It is also unlikely that all network affiliates in a market will flock to off-network shows, given the incentive to counter- program with different program formats. In addition, in the event the networks and their affiliates opt to run network programming during the access hour, off-network fare will continue to be available to independents. Finally, in the event an off-network program is displaced from an independent station, the station can turn to first-run syndicated programming. First-run programming can generate higher ratings than off-network shows, with associated carryover ratings benefits. Many independents air first-run programs in prime time today; for example, among non-Fox independent stations in the top-50 markets, 39 percent of prime time hours were first-run syndication. 92. We also note that the argument advanced in favor of giving a competitive advantage to independent stations, taken to its logical conclusion, would suggest that PTAR coverage be redefined so that it applies to smaller, and less financially secure, markets. Yet no party has proposed such a result. To the contrary, PTAR benefits appear to flow mainly to the stronger independent stations in the country. In fact, these stations generally have affiliated with one of the new networks or are part of a jointly owned station group. According to NBC, there is not a single independent station in the top 50 markets showing a top-five rated off-network program that is (1) a UHF station that is (2) not affiliated with Fox, UPN, or WB, and/or (3) not owned by a company owning three or more stations. Thus, the impact of repeal of the rule may primarily be felt by the stronger independent stations. In addition, these stations participate in joint purchasing or production arrangements that may ameliorate some of the effects of PTAR's repeal on program prices. 93. Growth in Numbers of Independents. One of the reasons that the LECG Study and INTV claim as support for the proposition that repeal of PTAR will substantially hurt UHF independent stations is that the adoption of PTAR allegedly was responsible for significant growth in the number of independent stations, albeit not until 5-15 years later. However, EI shows that LECG's model can be used to demonstrate that PTAR is not responsible for the increase in the number of independent stations. The reason that the parties can reach such contradictory conclusions is that LECG employs two different equations, one of logit form and one of linear form, to link PTAR adoption to growth in the number of independent stations. EI shows that the linear form results in reduced numbers of independent stations for 31 years following the adoption of PTAR in 1970, until the number of independent stations increases in the 32nd year, the year 2002. The logit form indicates that PTAR will result in an increase, consistent with LECG claims, in the number of independent stations after ten years. EI's explanation for the seemingly anomalous result that PTAR, in LECG's linear model, reduces the number of independent stations is that LECG's model includes meaningless variables and fails to include important ones, such as cable penetration and demand for advertising. EI argues that the latter two variables are likely to have influenced the entry of independent stations. Thus, given the different results obtained by the logit and linear forms that LECG employed, we cannot conclude that PTAR's adoption caused a significant increase in the number of independent stations. Nor can we therefore conclude that PTAR's repeal will cause the large reduction in the number of independent stations claimed by the rule's proponents. 94. The Impact of PTAR on Profits and Programming. Even if we assume that LECG is correct in its prediction of a ratings decline for independent stations in the event PTAR is repealed, it has not demonstrated how that would affect independent stations and the future development of new networks. In particular, LECG has not provided any convincing estimate of how a decline in audience share during 1 or 2 hours of prime time, would lead to a large decline in station revenues and a resulting decline in station profits. 95. The LECG Study asserts that the profits of independent stations will drop and some independent stations will exit the market as a result of the repeal of PTAR. Surprisingly, however, it does not quantify the extent to which profits will drop if PTAR is repealed or estimate the number of stations that will exit. INTV reports the results of an "informal" survey of 40 independent stations indicating that 16 percent of independent station revenue comes from the prime time access period. However, this "informal" survey does not appear to be a random survey. We therefore do not know if this revenue estimate is truly representative. Nor does INTV or the LECG Study relate these access period revenues to station profitability. Proponents of the rule have thus not provided any reliable basis to find that the profits of independent stations would decline significantly. More importantly, there is no credible evidence in the record to support these parties' claims that repeal of the rule will so affect the financial health of independent stations as to force stations off the air or undermine their ability to provide public interest programming, including news and other public affairs programming. 96. What the record does show is a generally healthy financial picture for independent stations. Profit data published by the National Association of Broadcasters ("NAB") indicate that the average independent station has generally been profitable, at least since the mid- 1980s. The average UHF station has been profitable since 1992 after a number of unprofitable years through the 1980s. This strong financial picture extends to the independent stations not affiliated with the largest of the new networks, Fox. These stations reported, on average, 1993 profits of four million dollars per station. UHF non-Fox affiliated independents reported average annual profits of $1.5 million per station in 1993. Also, these average profits understate profitability in the largest markets, those to which PTAR applies. 97. Conclusions. We thus conclude that PTAR is not necessary to provide independent stations a competitive advantage relative to the Top 50 Market Affiliates. Independent stations may face greater competition in programming the access hour without PTAR. But there is no reliable evidence that this will so jeopardize the financial health of independent stations as to implicate public interest concerns, particularly those relating to outlet diversity. 98. We also note that the application of PTAR has become increasingly overbroad and inequitable. Of the 278 "independent" stations in the PTAR Top 50 Markets, 54 derive no benefit from PTAR because they are foreign language, religious, or home shopping stations. Of the remaining 223 stations, 41 are VHF stations that cannot claim any signal disadvantage specifically warranting PTAR protection. (Indeed, these VHF independents appear to be on average financially stronger than affiliates of the three networks.) Of the remaining 182 UHF independent stations, 32 are affiliated with or owned by Fox, which has developed as a strong fourth network. In addition, 43 of these remaining 150 independent stations are owned by group owners capable of using their bargaining advantages due to size to obtain programming on improved terms. Further, 52 of these stations have affiliated with UPN and WB, a number likely to increase as those networks continue to develop. We also note the development of programming consortia, groups of allied stations joining together to produce and syndicate television programs. This trend is likely to continue as the marketplace adjusts to changes in the supply and demand for programming. In short, PTAR now applies to no more than 56 independent stations that have no affiliation or other similar bargaining advantages in obtaining programming. This number is approximately 20 percent of the 278 independents in the PTAR Top 50 Markets. 3. Repeal of PTAR and New Broadcast Networks 99. According to proponents of PTAR, one of the major reasons why PTAR has been and continues to be important is that by promoting the health of independent stations, it has helped create an important and necessary condition for the development of the new networks -- Fox, UPN and WB. These parties argue that PTAR improves the ratings and revenues and thus makes them attractive as potential affiliates for the newly developing networks. Viacom also argues that the popular off-network shows that independent stations air during the access period have carryover effects, through audience viewing patterns and in promotions during the access period, that can attract audiences to the Fox, UPN, or WB programming to be shown in the adjacent prime time period. Proponents of the rule argue that repeal will severely harm independent stations and, in turn, harm the growth of UPN and WB. 100. These parties, however, have not demonstrated the link between the asserted harm to independent stations as a result of the repeal of PTAR and the decreased likelihood of the development of new networks. In their analysis concerning PTAR and the improving position of those stations and new networks, PTAR proponents seem to suggest that the profitability of independent stations has been responsible for the growth of newly emerging networks, especially the Fox network. However, it is equally plausible that many affiliates of the Fox network owe their improved profit position to their affiliation with Fox. Regardless of the possible importance of both parts of this interaction, parties favoring continuation of PTAR have not demonstrated in any convincing way that PTAR itself is ultimately responsible for the development of newly emerging networks. 101. The Commission does not believe that repeal of PTAR will create the grounds for failure of newly-launched television networks nor for significant slowing in their development. Some independent stations may find their profits reduced as the industry adjusts to this change and other regulatory and technological changes. However, the Commission concludes that the prospects for independent stations and new networks overall are good. First, the Commission believes that the UHF signal disparity has been reduced, albeit not entirely. This permits competition for programming on more even terms between similarly situated UHF and VHF stations, most of which are now network affiliates. Second, the video programming production market appears to be open to entry by large and small firms with many producers actively seeking outlets for their programs. Third, the numbers of independent stations remain large enough to make it possible for new networks to add affiliates and expand audience reach. Finally, at the present time, virtually all categories of television broadcast stations are, on average, profitable. The repeal of PTAR will reduce costs imposed by the rule's restrictions on affiliates, network program producers, and viewers who prefer high-cost programming, and will not create significant problems for independent stations and new networks. 102. On July 7, 1995, LECG submitted a "Surrebuttal and Further Econometric Evidence" in this proceeding. We have also received a number of written submissions from INTV under our ex parte rules. These filings reply to a number of criticisms of the LECG Study made by a number of commenters, and seek to provide further support for the argument that PTAR continues to be necessary to ensure the growth of independent stations and new networks. We have carefully reviewed these submissions. As set forth more fully in Appendix E, they do not provide sufficient evidence to alter our conclusion that PTAR is not necessary to provide independent stations or new networks a competitive advantage relative to the Top 50 Market Affiliates. C. Reducing Network Ability to Dictate Affiliate Programming Choices 103. PTAR prohibits the Top 50 Market Affiliates from obtaining network-provided programs or off-network programs during the access period. In 1970, when it adopted PTAR, the Commission concluded that this was a reasonable method of protecting affiliates against the power of the networks. Under this reasoning, the affiliates did not have sufficient bargaining power to refuse to run network programs, even when doing so was not in their economic self-interest. Thus, although the rule limited the programming options available to affiliates during one hour and consequently limited to the same extent the viewing options available to viewers, nonetheless the affiliates may have believed they were better off with the rule than without the rule, given the dominant position of the three networks. The view was that while a network would dictate one program shown nationally for the access period, the rule would permit the affiliate to choose instead from a range of choices (i.e., in-house or independently produced programs). 104. The network affiliates, along with the Coalition, argue that only the off-network provision of the rule should be repealed. They assert that the off-network provision unnecessarily restricts affiliate program choice and has discouraged investment in network program production. They believe, however, that the network restriction continues to be warranted. According to these parties, the networks, despite such safeguards as the "right to reject" rule, still have the power to dictate affiliate program choices in prime time, enabling them to require clearance of network programming during the access period. The network affiliates and the Coalition argue that this in turn frustrates the "independence of affiliates to make programming decisions in response to local demand." The networks dispute that they have this bargaining power. They also point to the efficiencies and consumer benefits that derive from network programming. 105. Proponents of the network restriction argue that there are some indications that the networks continue to have significant bargaining leverage over their affiliates. Prime time clearance levels are very high. Affiliates of the three networks cleared 98 percent of network programming during the 1993-94 season. The record also shows that affiliates rarely preempt prime time network programming, and that affiliate agreements are often structured to discourage preemption. In addition, the increase in the number of independent stations may have increased the demand and competition for the most lucrative network affiliations. This may therefore reduce, at least to some degree, the increased leverage the network affiliates appear to have gained as a result of the emergence of the Fox network. Moreover, the WB and UPN networks, only recently launched and presently offering a minimal program schedule, may not yet provide a competitive alternative to affiliation with one of the other four networks. 106. On balance, however, we do not believe PTAR's network restriction is the appropriate mechanism under current market conditions to address the issue of the relative bargaining power between networks and affiliates. As an initial matter, high clearance rates do not necessarily indicate undue network leverage; they may simply reflect the popularity and efficiencies of network programming. There is also evidence in the record indicating greater affiliate bargaining power today. The emergence of the Fox network certainly can be said to have improved affiliate bargaining power by creating a viable affiliation alternative to ABC, CBS, and NBC. This is demonstrated by the flurry of recent affiliation switches. Since May 1994, 68 stations have changed network affiliation. Of these, 21 switched from one of the three original networks to the Fox network. This competition for affiliates has apparently resulted in greater affiliate compensation. The EI Study cites estimates that the three original networks will pay $200 million or more in additional compensation due to the more competitive market. The networks also point to the fact that the total amount of network programming during non-prime time dayparts has declined over the years as evidence of the inability of networks to dictate to affiliates. Finally, there are today many more options for obtaining programming even without having a network affiliation. 107. We note that we are not concerned with the relative bargaining position of networks and their affiliates to the extent it merely affects the distribution of profits between the parties. Rather, the public interest is implicated where network leverage prevents an affiliate from fulfilling its public interest obligations, such as broadcasting programming responsive to local interests, or distorts the normal market incentive to air programming according to viewer preferences. 108. We think these issues are best addressed in the context of our rules governing a station's right to reject network programming, the filing of affiliation agreements, and our other rules regarding the network-affiliate relationship. The Commission has initiated a comprehensive review of these rules. In doing so, it will address the issues the parties have raised here, including "whether networks . . . have the capability and the incentive to exercise undue market or bargaining power in the absence of these rules and [the] public interest concerns any such capability and incentive would raise." These rules, and their corollary rulemaking proceedings, are better tailored to weigh the public interest issues and strike the appropriate balance regarding regulation of the network-affiliate relationship. PTAR, in contrast, is an imprecise, indiscriminate response to these concerns. Network leverage will vary from market to market, indeed from station to station. The network-affiliate bargaining table may look far different to a small, individually owned station in Louisville compared to an established, group-owned station in Chicago. Yet PTAR treats both stations the same. In doing so, the rule denies networks and stations the option of taking advantage of network efficiencies during the access period that can lead to the financing of popular, higher cost programs. It does this in all markets, for it is not economical for the networks to run a network feed in non-PTAR markets when they cannot do so in the top 50 markets. 109. The Coalition and the WW Study argue that the process by which the networks develop the programming for their affiliates involves a more hierarchical process that imposes bureaucratic costs and restrains program innovation and diversity. Yet they provide no empirical evidence to substantiate this claim. They also do not explain why these same problems would not exist with contracts between broadcast stations and suppliers of non- network programming, many of which are large Hollywood studios. In any event, we conclude that the competition the networks face would appear to give the networks a substantial incentive to ensure that their program production and selection process is innovative and not bogged down by bureaucratic inefficiencies. 110. These parties also argue that the network restriction solves a collective action problem. According to this theory, it is more profitable for both affiliates and the networks not to run network programming during the access hour, but only provided they are each assured that no other affiliates or networks airs network programming. Such an arrangement, while contrary to the antitrust laws if established by individual parties, is made possible by PTAR's network restriction. 111. We do not believe this theory justifies continuation of PTAR. To begin with, it is speculative. The Network Inquiry Staff stated that this collective action theory was only one of several possible scenarios: "[w]hile it is possible for both networks and affiliates to benefit from [PTAR], other outcomes in which network and station profits are reduced are also possible." It is also inconsistent with the networks' position in this proceeding. They advocate repeal of the network restriction. And, while proponents of the network restriction claim that PTAR, by solving this collective action problem, has led to greater local programming and news, they provide no evidence in the record to support such a causal link. We also note that, according to these parties' own comments, 83 percent of affiliate access period programming in the top-50 markets is neither local programming nor local news. 112. In sum, the record before us establishes sufficient improvement in affiliate bargaining power vis-a-vis the networks that any remaining issues concerning the network- affiliate relationship are best addressed in our network rules. VII. SUMMARY OF FINDINGS AND TRANSITION 113. Summary of Findings. The Commission adopted PTAR in 1970 as a structural rule to promote its competition and diversity goals. It did so at a time when the three major networks were said to dominate the television marketplace. The record shows that this is not the case under today's market conditions. The three networks now face greater competition than they did in 1970. There has been dramatic growth in the number of independent stations, and broadcasters now must compete for audiences with the increasing numbers of non-broadcast outlets, especially cable service. The networks can no longer be viewed as a funnel through which all television programming must pass. PTAR is thus not necessary to promote independent program sources, PTAR's primary goal. The record shows that the large number of video programming outlets today creates a healthy demand for non-network programs. 114. We also conclude that there is no public interest reason for continuing PTAR as a means of providing independent stations or new broadcast networks a competitive advantage relative to network affiliates in programming the access hour. Independent stations have grown dramatically since 1970 largely due to a number of factors unrelated to PTAR. While they will face greater competition in the absence of the rule, there is no reliable evidence in the record to support their claims that repeal will so affect their ratings and profits as to implicate their overall viability, the amount of public interest programming they air, or the development of new networks. Finally, we conclude that PTAR is not an appropriate mechanism for safeguarding affiliate autonomy. Affiliates have gained greater bargaining power since adoption of the rule, and any remaining concerns regarding the network-affiliate relationship are best addressed in the context of our other network rules which are presently under review. 115. We thus find that the public interest does not warrant the continuation of PTAR. This is especially the case given the costs the rule imposes. It deprives the three networks and their affiliates of the opportunity of taking advantage of network efficiencies which can provide important consumer benefits in terms of popular, high-cost programming. The record also indicates that the rule discourages investment in network programming by lowering the prices of off-network programs. Because we find no public interest benefits that outweigh these costs, we conclude that PTAR should be repealed. 116. Transition. The Notice sought comment on whether, in the event we conclude that PTAR should be eliminated, we should repeal the rule immediately or adopt a transition mechanism that would sunset the rule after a certain period of time. As noted above, the record before us provides strong support for repeal of the rule. A transition consequently is not necessary to take a "wait and see" approach in order to test, and possibly revisit, the conclusion we reach today. We do, however, believe a short transition period is appropriate to allow "industry participants to adjust to the changing economic conditions that might result" from repeal of PTAR. The PTAR regulatory scheme has been in place for over two decades, during which time members of the industry have come to rely on the structure imposed by that scheme. Eliminating that structure precipitously may have disruptive effects as the marketplace adjusts to the deregulated environment. A one-year transition will give parties time to adjust their business plans and contractual arrangements prior to repeal of the rule and moderate an unnecessarily abrupt impact on affected stations. 117. Independent stations in particular will need to adjust to these new marketplace dynamics. With repeal of the rule, independent stations may have to pay higher prices for popular off-network hits, and may be outbid for some of these shows by network affiliates. Independent stations may also face the prospect of competing against network programming during the access hour if the networks and their affiliates opt to run a network feed during this time period. 118. A one-year transition will provide independent stations time to adjust their business plans and programming strategies in response to these changes in the market. During the transition, independents may develop new programming strategies, budget additional funds to buy off-network programs that may become more expensive with repeal of the rule, or establish relationships with new program suppliers. The transition may also assist those stations in adapting to possible post-repeal programming changes that are announced by network affiliates. 119. We recognize that existing contractual arrangements may already provide some transition period for independent stations who have obtained licensing rights to air off- network programs during the access period for the 1995-96 season and even for subsequent years. Similarly, the need for the Commission to fashion a transition period is also lessened by the fact that the programming schedules for the networks and their affiliates have, as a practical matter, been established. Network affiliates that have shown first-run syndicated programs during the access hour have most likely already made contractual commitments to run this programming for the upcoming season. The effect of a transitionary delay of PTAR repeal is also slight in connection with the network programming restriction. As a general matter, the networks and their affiliates would need some lead time before they could air network-provided programming during the access hour in the event they choose to do so. Thus, we would not expect our repeal of PTAR generally to create a situation whereby independent stations are faced with immediate price increases for programming to be aired in the coming year, or with immediate widespread programming changes on the part of the Top 50 PTAR Market Affiliates. 120. Some changes, however, could and would be expected to occur. Network affiliates often contract for off-network programs to air in other dayparts, such as early fringe and late fringe. Absent the transition period, these contracts could be renegotiated and modified to allow Top 50 PTAR Market Affiliates to air such programming during the access period. By establishing a one-year transition, the Commission will consequently provide a more stable adjustment period during which independent stations can be assured that they will not have to respond to possible immediate programming changes by Top 50 PTAR Market Affiliates. While the benefit of the transition is admittedly modest, given the stability inherent in the existing contractual process, the costs to affiliates and the networks that will continue to be restricted by the rule during the transition year are correspondingly low in light of the fact that the affiliates have disincentives to alter their programming schedules in the near-term even if repeal were immediate. On balance, we believe that the benefits of a short transition outweigh these costs. We also note that Top 50 PTAR Market Affiliates will be free to contract during the transition period for the right to air access-period network or off- network programming after the effective date of PTAR repeal. 121. We reject transition proposals that would continue PTAR for an indefinite or overly long period of time. Such proposals, if adopted, would impose costs that outweigh any possible benefits of a longer transition. The record in this proceeding demonstrates that continuation of the rule is not in the public interest; prolonging PTAR simply as a means of continuing to confer competitive benefits on independent stations therefore cannot be justified. 122. Nor do we believe the scheduled repeal of the remaining fin/syn rules calls for a longer transition period for PTAR. A number of the fin/syn rules, including restrictions on network acquisition of financial interests in prime time programming, were eliminated over two years ago; the marketplace thus should have had time to adjust to the elimination of these rules. No party has made a convincing case that the upcoming planned repeal of the remainder of these rules will lead to any anticompetitive activities by the networks or undue disruption of the marketplace so as to warrant postponing PTAR repeal beyond a year. We also do not believe it is necessary to take a staggered approach to repeal or schedule a final review of the rule prior to its scheduled expiration, as we did in the fin/syn proceeding. The record in this proceeding clearly supports repeal of PTAR, and the three networks can be said to be facing even more competition today than they were when the Commission established its fin/syn transition in 1993. Phased deregulation is less useful when the transition period is as a means of minimizing disruption in repealing a regulation as opposed to taking several cautionary steps in order to confirm the planned elimination of an entire rule. The transition plan we adopt today is not motivated by any uncertainty over our conclusion to repeal PTAR, but rather by a concern that immediate repeal could be unnecessarily disruptive. 123. We believe that a one-year transition period strikes the appropriate balance between our conclusion to repeal PTAR and the need to avoid undue disruption from eliminating a 25-year old rule. The courts have noted the considerable discretion that the Commission has in establishing timetables to minimize disruption from regulatory changes. Indeed, there is judicial precedent in the context of PTAR for the proposition that a transition period is permissible when necessary to allow parties time to adjust to deregulation. 124. We will thus schedule repeal of the rule in its entirety for August 30, 1996. This will provide ample time for publication of this Report and Order in the Federal Register before the one-year transition period commences. It also allows this period to end prior to the start of the 1996-97 television season. 125. Other Issues. Given our conclusion that PTAR no longer serves the public interest and should be repealed, we need not address the argument advanced by a number of parties that the rule is contrary to the First Amendment. We also do not believe it is appropriate to alter the definition of "network" to include the new networks as urged by some parties. We are not persuaded that this definition is inequitable or that it causes new networks to curtail their prime time offerings in order to evade the application of PTAR. In any event, the rule will expire in a year and would have little if any impact on an entity that became a "network" during that time period given the grandfathering provisions presently set forth in the rule. Finally, given our decision to repeal the rule, we will not modify the current exemptions to PTAR as proposed by a number of commenters. The proposed revisions to the definition of a "network" and the rule's exemptions are not appropriate for the one-year transition we have established. Indeed, modifying these provisions of the rule could run directly counter to the purposes of the transition by creating uncertainty and disruption during a period that is intended to provide parties time to adjust for repeal of the PTAR. We will consequently retain PTAR in its existing form during the one-year transition period. VIII. ADMINISTRATIVE MATTERS A. Regulatory Flexibility Analysis 126. Need for and purpose of this Action: This action is taken to repeal the prime time access rule, 47 C.F.R. 73.658(k), in response to changes in the communications marketplace, and to better adjust to the needs of the public. The Commission believes that this action will remove barriers to competition in the markets for video programming and enhance program diversity for television viewers. The Commission stated that the rule will be repealed on August 30, 1996, which will give affected parties time to adjust their business plans and contractual arrangements in order to avoid an unnecessarily abrupt impact associated with repeal to viewer and industry structures that have developed in the 25 years that the subject rule has been in place. 127. Summary of Issues Raised by the Public Comments in Response to the Initial Regulatory Flexibility Analysis: None. 128. Significant Alternatives Considered and Rejected: The Commission determined that, based on the record developed in this proceeding and existing marketplace conditions, the public interest will be served by repeal of PTAR. Proponents of retaining the rule failed to establish that it remains necessary to ensure the diversity of programming sources and outlets contemplated by adoption of PTAR. Moreover, these parties have not demonstrated convincingly that PTAR itself is ultimately responsible for the development of newly emerging networks or that repeal of the rule will threaten the station base of the new networks. Those favoring repeal of the rule established that the rule unnecessarily limits the programming choices of network-affiliated stations in the Top 50 television markets and discourages investment in network programming, without off-setting public interest benefits. 129. The Secretary shall send a copy of this Report and Order, including the Final Regulatory Flexibility Analysis, to the Chief Counsel for Advocacy of the Small Business Administration in accordance with paragraph 603(a) of the Regulatory Flexibility Act, 4 U.S.C.  601, et seq. B. Additional Information 130. For additional information regarding this proceeding, contact Charles W. Logan or Alan E. Aronowitz, Mass Media Bureau, Policy and Rules Division, Legal Branch, (202) 776-1653, or Alan Baughcum, Mass Media Bureau, Policy and Rules Division, Policy Analysis Branch, (202) 739-0770. IX. ORDERING CLAUSES 131. IT IS THEREFORE ORDERED that, pursuant to the authority contained in Section 4(i) and 303(r) of the Communications Act of 1934, as amended, 47 U.S.C. Section 154(i), 303(r), Section 73.658(k) of the Commission's Rules, 47 C.F.R.  73.658(k), IS HEREBY REPEALED EFFECTIVE August 30, 1996, and that Part 73 of the Commission's Rules IS AMENDED as set forth in the attached Appendix F effective August 30, 1996. 132. IT IS FURTHER ORDERED that MM Docket No. 94-123 IS TERMINATED. FEDERAL COMMUNICATIONS COMMISSION William F. Caton Acting Secretary Appendix A The following parties filed formal comments in response to the FCC's Notice of Proposed Rule Making: 1. The Association of Independent Television Stations, Inc. 2. Bureau of Economics, Federal Trade Commission 3. Capital Cities/ABC, Inc. 4. CBS Inc. 5. Chief Counsel for Advocacy, United States Small Business Administration 6. The Coalition to Enhance Diversity 7. The Commissioner of Baseball 8. Economists Incorporated (Economic Analysis prepared for ABC, CBS and NBC) 9. Freedom of Expression Foundation, Inc. 10. The Freedom Forum First Amendment Center at Vanderbilt University 11. First Media Television, L.P. 12. Friends of Prime Time Access 13. King World Productions, Inc. 14. The Law and Economics Consulting Group Inc. (Economic Report prepared for INTV, King World & Viacom) 15. Media Access Project/People for the American Way 16. The Media Institute 17. The Motion Picture Association of America, Inc. 18. National Broadcasting Company, Inc. (NBC) 19. Network Affiliated Stations Alliance 20. UPN Affiliates Association 21. Viacom Inc. 22. Westinghouse Broadcasting Company (Group W) 23. Oliver E. Williamson & Glenn A. Woroch (A Comparative Efficiency Analysis prepared for the Coalition to Enhance Diversity) The following parties filed formal reply comments in response to the FCC's Notice of Proposed Rule Making: 1. The Association of Independent Television Stations, Inc. 2. Capital Cities/ABC, Inc. 3. CBS Inc. 4. The Coalition to Enhance Diversity 5. Economists Incorporated (Economic Analysis prepared for ABC, CBS and NBC) 6. Friends of Prime Time Access 7. King World Productions, Inc. 8. The Law and Economics Consulting Group Inc. (Economic Report prepared for INTV, King World & Viacom) 9. Media Access Project/People for the American Way 10. National Broadcasting Company, Inc. (NBC) 11. Network Affiliated Stations Alliance 12. Viacom Inc. 13. Oliver E. Williamson & Glenn A. Woroch (A Comparative Efficiency Analysis prepared for the Coalition to Enhance Diversity) Appendix B: Additional Discussion of the EI Study's of the UHF Handicap 1. INTV makes several criticisms of the EI update of Park's study. First, the data samples used by Park and the EI Study are allegedly flawed. Only counties within 35 miles of a television city were included; 41 fringe area counties were dropped. Thus, INTV argues, the studies only could reflect the potentially better reception of UHF signals on cable systems located well within their off-air coverage areas. The Commission notes however that, under "must carry," UHF stations can invest in equipment that will require the cable system to extend the area in which the station may be viewed. INTV has provided no evidence that viewing patterns in fringe areas will somehow differ from those near cities. In the absence of such argument or evidence, it is reasonable to rely upon the conclusions of the EI Study. 2. Second, INTV argues that the EI Study fails to explain the anomalous result that UHF affiliates suffer a handicap compared to VHF affiliates while independents show no such differential. However, the Commission notes that the EI Study, at 84, offered two explanations: The continuing handicap of UHF network affiliates may reflect their status as small-market stations, perhaps unable economically to invest in the extra broadcast facilities necessary to overcome the handicap. Further, both Park's and the present results may be affected by the nature of the sample of markets, and this may explain the unexpected persistence of a UHF handicap for affiliated stations. A more representative sample doubtless would confirm the common-sense hypothesis that the UHF handicap has been greatly reduced for all classes of station. 3. Third, INTV argues that, unlike Park, the EI Study made no distinction between local and distant signals. Thus, for example, the presence of national superstation WTBS, a UHF independent, in the Southeast might greatly reduce the apparent UHF handicap of all independents and mask the continuation of the UHF handicap for all local stations. However, the EI study at 86, n.127, notes that "[o]nly those stations were examined that could likely be received off the air: those for which most of the county was within Grade B contour or those which had a non-cable household all-day share of 5 percent or greater." WTBS was counted as an independent in those counties that fell into the Grade B contour. Everywhere else, its contribution was counted as another cable network. Thus, the Commission believes that INTV's criticism is without merit. Appendix C: Technical Problems with the LECG Study 1. LECG's assertion that independents' ratings will drop by 58 percent is based on an econometric model in which independent station performance (measured by growth in the number of independent stations per market, average independent station ratings in a market, and aggregate ratings of all independent stations in the market) depends on the period of time (T71) since the adoption of PTAR, TV households in the ADI (Area of Dominant Influence), the percentage of TV households in the ADI with cable, percentage of TV households in the ADI with UHF reception, average real per capita income in the ADI, and the number of independent stations in the market. 2. There are numerous econometric problems with the LECG Study's regression analysis that predicts a 58 percent drop in independent station ratings with the repeal of PTAR: a. There is a serious econometric problem with the variable T71. In general, the use of time in this fashion as an explanatory variable is problematic. First, it may mask something else happening in the market, e.g., changes in the courts and at the Commission that foster ease of entry into broadcasting and cable television. There may be other variables that should be included that are not. Second, as time approaches infinity, the mean value of time may be nonexistent. In such a case, the time trend variable is non-stationary. However, the regression theory used by LECG requires that each variable be stationary, i.e., have a finite variance. As a result of nonstationarity, the basic assumptions underlying statistical tests used to evaluate the regressions and their results are not fulfilled. Therefore, the regression results in the LECG Study are not necessarily valid. b. Another set of problems arises with Table D.3 (page 47 of Appendix D). That table presents the results of a logit regression, by definition non-linear, to estimate a version of Equation (D.1). There is no mention of the nonlinear regression algorithm. In such a nonlinear analysis, it is necessary to identify the starting point for the regression. These two problems mean that we cannot evaluate the quality of the regression. c. A continuing problem with LECG's regression analysis is illustrated by Tables D-3 and D-4 of their study. In those tables, various sample sizes are identified (e.g., N = 271; N = 1065; N = 355). Yet nowhere in their analysis is there a discussion of how these sample sizes arose. d. Similarly, the R2s reported in LECG's Table D-4 are .20 and .62. This suggests that there is a lot of random noise in the regression results. The standard error of the estimate is factored into the calculation of prediction intervals. Table D-5 predicts the ratings of an average independent station with and without PTAR. It is from these ratings that the LECG Study concludes that repeal of PTAR will lower independent stations' ratings by 58 percent. Some of those incremental effects are quite small, very close to zero. The authors present no prediction intervals for those estimated effects. The same is true for other tables, e.g., Table D-7, that report predicted effects of PTAR's repeal. Appendix D: Video Programming Distribution Concentration in the Top 50 PTAR Markets Data Notes 1. First, Commission staff relied on the list of the Top-50 PTAR Markets in 1994 as shown in the Commission's Public Notice, dated April 16, 1990. (These markets are ranked on the number of prime time households, instead of the more usual market rankings based on total television households.) 2. Second, CBS affiliates broadcast the Olympics during February, 1994. CBS affiliates' market shares are therefore unusually high during this month. This increases the calculated HHIs for February, 1994. 3. Third, the source for market shares was Investing in Television: 1995 Market Report, First Edition, BIA. The totals for market shares in each market did not always add up to 100 percent, ranging from a low of 59 percent to a high, in one instance only, of 103 percent. Staff makes the reasonable assumption that the "missing" shares belong to numerous stations with individual market shares so low that it is not worthwhile for BIA to print them. Given this assumption, the HHIs calculated by staff should be close approximations to the actual HHIs. Appendix E: Analysis of LECG's Surrebuttal and Ex Parte Materials 1. INTV and their consultant, LECG, filed extensive surrebuttal and ex parte materials toward the end of this proceeding. We have carefully reviewed and analyzed these materials. Our conclusions on the essential issues raised by INTV and LECG are: þ LECG's responses to criticisms of their model were not sufficient to permit the Commission to rely upon LECG's predictions of a significant rating decline for independent stations if PTAR is repealed. þ INTV does not demonstrate that repeal of PTAR will lead to significant reductions in the revenues and profits of independents. þ LECG concludes erroneously that rising nominal network primetime advertising prices demonstrate network market power. þ LECG does not demonstrate that, after PTAR's repeal, viewer welfare will be reduced as the result of network affiliates' and independent stations' program purchases. 2. We here explain the basis for each of these conclusions in turn. The LECG Model 3. LECG does not discuss the nonstationarity problems with their time trend variables as identified in Appendix C of the draft PTAR order. Nor is their filing sufficient to remedy the problems with their model as listed in Section VI.B.2 of this order. 4. However, they do provide prediction intervals (confidence intervals for their predictions). The Commission has examined LECG's procedure for calculating these prediction intervals and finds it problematic. Indeed we conclude that their method for deriving these prediction intervals is incorrect. The correct method will result in broader prediction intervals, intervals that may well include zero. In such a case, LECG's predicted ratings changes due to PTAR's repeal cannot be statistically distinguished from no decline in ratings at all. Revenues and Profits of Independent Television Stations 5. INTV asserts that they have used three "separate" methods of calculating the revenue loss to independents due to PTAR's repeal. However, INTV's three methods are not truly separate because all rely upon estimates of ratings declines in the access period predicted by LECG's model. We have already explained why we choose not to rely upon that model's predictions. 6. Second, each of the first two estimation methods employed by INTV relies on the same "16%" statistic. INTV conducted an "informal" survey to determine that 16% of independents' revenues came from the access period. Because that survey is not necessarily representative, we can conclude little from the use of the 16% figure to derive estimates of lost revenues and profits. 7. Third, the same informal INTV survey was used to estimate that independents' costs would rise by 17% as programming prices rise following PTAR's repeal. Again, the study cannot be assumed to be representative. Also, the study may be flawed because the independent station respondents had an incentive to bias upwards their estimates of cost increases (as well as revenue losses) in their responses to INTV's questions. Nominal Network Advertising Prices and Market Power 8. In Section IV.C, we note that LECG failed to adjust the networks' nominal prices for inflation or to consider whether increased demand for network advertising might explain any (real) rise in prices. In their Surrebuttal at 65, LECG asserts: ". . .such an increase in demand [for advertising] does not lead to an increase in advertising rates if, as EI claims, the market at issue is competitive." 9. The Commission concludes that LECG has made two errors in their economic analysis: first, they focus on nominal rather than real prices, and second, they argue that the long-run supply curve in competitive markets must be flat.. Depending on whether the long- run market supply curve is upward-sloping, flat, or downward-sloping, real prices would go up, stay constant, or drop, respectively, as demand in competitive markets increases. 10. At page 66 of their Surrebuttal, LECG states: "An increase in demand that does lead to an increase in price in the long run is consistent with a market in which some degree of market power exists because of, for example, barriers to entry due to a scarcity of VHF spectrum allocations." A standard text (Managerial Economics, S. Charles Maurice, Christopher R. Thomas, and Charles W. Smithson (Irwin: Homewood, IL), 1992, at 452) explains that the long run supply in a competitive industry can exhibit increasing or constant costs. An increasing-cost industry is simply one in which input prices rise as all firms in the industry expand output. This does not require the exercise of market power. It simply reflects the fact that expansion in the, say, wheat-growing industry may increase the demand for and price of, for example, mechanical harvesters. Therefore as the price of wheat rises and wheat growers expand production in the long-run, their costs rise because the price of mechanical harvesters inter alia rises. This does not require the exercise of market power by wheat growers or by manufacturers of mechanical harvesters. Program Purchases and Viewer Welfare 11. The model presented by LECG assumes that there are two possible program choices: an off-network program which has a cost of c that is sunk, and a first-run program which has a cost of c that is not sunk. The off-network program generates revenue rs and the first-run program generates a revenue of rh > rs. The total surplus to be divided between the station and the producer of the off-network program is rs - 0; 0 because the cost is sunk. The surplus to be divided between the station and the producer of the first run program is rh - c. 12. For the moment, assume that the program's revenue is a good measure of the consumer welfare generated by the program. Then, total welfare is maximized by picking the program associated with the largest surplus. In this case, the rule is to pick the off-network program if rs > rh - c and to pick the first-run program otherwise. Clearly, because c is a positive number, the first-run program may not be chosen, even though it generates more consumer welfare. 13. The possibility that the program generating the most consumer welfare is not chosen is the welfare bias, according to LECG. However, their conclusion is misleading because they fail to account for the cost of the program. Although consumer welfare may be higher with the first-run program, the extra welfare comes at a cost of c, and the cost may outweigh the benefit. In fact, the above decision rule does not harbor a welfare bias; it is a good rule if revenue is a good measure of consumer welfare. 14. The revenues of independent stations are unlikely to be an appropriate measure of social welfare. Revenues are the product of the quantities purchased multiplied by the price charged. Welfare is measured by the consumer surplus, the dollar value of the willingness-to- pay of consumers (or viewers) in excess of the price actually charged. There is no reason to expect that revenues will equal the dollar value of consumers' surplus. LECG has therefore failed to document that social welfare is reduced by repeal of PTAR. Appendix F: Rule Changes Part 73 of Title 47 of the U.S. Code of Federal Regulations is amended as follows: Part 73 RADIO BROADCAST SERVICES 1. The Authority Citation for Part 73 continues to read as follows: AUTHORITY: 47 U.S.C.  154, 303, 334. 2. Section 73.658 is amended by removing and reserving paragraph (k).