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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  X-distribution in any of these local markets.i?P u S"-ԍ#&a\  P6G;&P# See supra note 44.i  X-x30. Nor is it likely that affiliates in a local Top 50 PTAR Market would dominate as" ?0*(("  X-a group since video programming distribution is only moderately concentrated.d@6u Sy-ԍ#&a\  P6G;&P# Economists use a measure known as the HerfindahlHirschman Index ("HHI") to measure market concentration. In simple terms, the HHI is the sum of the squared market shares of each company in the market. For example, if a market has four equalsized companies, then each  S-company's market share is 25 percent; the HHI would be: 252 + 252 + 252 + 252 = 2500. The U.S. Department of Justice ("DOJ") and the Federal Trade Commission ("FTC"), based upon extensive study of different industries, generally regard a market with an HHI below 1000 as "unconcentrated," a market between 10001800 as "moderately concentrated," and a market above 1800 as "highly  Sa-concentrated." See the 1992 DOJ/FTC Merger Guidelines at  1.51. In the last instance, more research into ease of entry and other competitive factors is required before concluding that one or more businesses will be able to exercise market power. xUsing the prime time audience shares set forth in the EI Study (Appendix A, Table A1 at 66),  S -the HHI for national primetime broadcast television program distribution is 1366. This level of concentration has been dropping steadily since 1980. Calculations based on Table A1 of the EI Study show that concentration first dropped below 1800 in 1987/88, the second year of Fox's existence. xWe have also reviewed HHIs for each of the Top 50 PTAR Markets based on prime time and  S#-alldaypart ratings reported in Investing in Television: 1995 Market Report. These HHIs also indicate that video programming distribution in the Top 50 PTAR Markets is only moderately concentrated.  S-See Appendix D for a full listing of the HHIs for each market.d In its 1993 decision setting a timetable for repeal of the fin/syn rules, the Commission stated that "inter X-network competition for programming is 'intense.'"}Au SI-ԍ#&a\  P6G;&P# Fin/Syn Second R&O, 8 FCC Rcd at 3307.} Nothing in the record before us calls this conclusion into doubt, as the networks continue to wage a ratings war that has only been  X-heightened with the emergence of the Fox network.-Bhu S-ԍ#&a\  P6G;&P# See EI Study at 67 (describing competition between the networks). During the 199495  S-season, Fox in fact drew more viewers than CBS among adults aged 1834 and 1849 . ABC Comments at 6.-  Xv-x31. 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.  X -B.xThe Video Programming Production Market  X-x32. We begin to define the relevant video programming production market by  Xy-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. "KB0*(( " 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  Xv-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  X1-and operators,C1u S -ԍ#&a\  P6G;&P# We did not include cable networks in our narrow examination of broadcast program distribution. However, as we noted, a case can be made for such inclusion. In examining market power on the demand side of the video programming production market, we used a broad market  S2 -definition, as we did in our fin/syn decision. See Fin/Syn Second R&O, 8 FCC Rcd at 330304. Our list of buyers includes cable networks and operators since various cable channels are devoted to  S-showing exactly the same fare shown on network prime time, e.g., situation comedies, movies, etc. direct broadcast satellite operators, videocassette distributers and, most recently, video programming affiliates of local telephone companies, which propose to offer  X -video dialtone service.BD@ u SX-ԍ#&a\  P6G;&P# See Notice of Inquiry in CS Docket No. 9561, FCC 95186, released May 24, 1995, at  47 S2-55 (describing local exchange carrier entry into video programming market); First Report in CS Docket No. 9448, 75 RR 2d 1415, 143943 (1994) (same). For a discussion of telephone company  S-efforts to purchase video programming, see Mike Mills, "In Hollywood, Bells are Ringing,"  S-Washington Post, Nov. 1, 1994, at D1.B This market is "clearly national and perhaps international in scope, because television broadcasters obtain a large portion of their programs from national  X -providers."E u S2-ԍ#&a\  P6G;&P# TV Ownership Notice, 10 FCC Rcd at 3545.  X -x 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"|N E0*(("ԫnetwork program distributors already are beginning to purchase the quality programming previously sold only to the national networks. In this respect, we  X-find that the market power of the networks visavis other purchasers of programming is limited. Moreover, internetwork 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  X3-program acquisitions.}F3 S -ԍ#&a\  P6G;&P# Fin/Syn Second R&O, 8 FCC Rcd at 3308.}     X -x!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  X -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  X -programming.6G ju S-ԍ#&a\  P6G;&P# The Commission, in its Fin/Syn MO&O, 8 FCC Rcd at 828689, employed a broad measure of the demand side of the video programming production market and rejected the notion the three networks could exercise market power here. 6 Aside from the growth in the broadcast industry described above, there are  X-nearly 150 national and regional cable networks,qHu S-ԍ#&a\  P6G;&P# See Comments of NBC at 10.q most of which transmit original, nonnetwork programming. Also, other nonbroadcast video program distributors such as cable,  Xf-wireless cable, and satellite services have grown.If^u Su-ԍ#&a\  P6G;&P# See Notice of Inquiry in CS Docket No. 9561, FCC 95186, released May 24, 1995 (discussing status of cable industry, wireless cable, satellite master antenna systems, directtohome satellite  S'-services, video dialtone); First Report in CS Docket No. 9448, 75 RR 2d 1415 (1994) (same). Finally, firstrun syndicators are quite  XO-active as buyers (and sellers).JO u S-ԍ#&a\  P6G;&P# In 1994, there were 259 different programs in broadcast syndication, 75 percent of which were firstrun. Comments of NBC at 10; EI Study at 1718. 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  X -into account distribution fees associated with syndicated programming and home videos.`K * u S"-ԍ#&a\  P6G;&P# EI Study at 25.` 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"K0*(("  X-production market, either individually or together.LJ u Sy-ԍ #&a\  P6G;&P# The Commission calculated HHIs to measure concentration among market buyers in the video programming production market. We relied upon data in the EI Study, Appendix G, Table G2. Each network's market share of 9.4 percent contributes 88 points to the market's HHI. The three network's shares together contribute 265 points. Fox's share of 5.6 percent contributes 31 points. It is unlikely that any single market share held by a basic cable network, pay cable network, syndicator, or home video distributor would be as large as one of the four networks. No shares for these buyers are reported in Table G2. Our hypothesis is that the market shares of the remaining buyers are each quite small and therefore are unlikely to increase the market's HHI very much at all. Under these assumptions, the HHI for this market is at least 296 and probably no more than 500, depending on the  S -size of the market shares of nonnetwork buyers. The HHI is almost certainly less than 1000, i.e., the market is unconcentrated by the standards of the 1992 DOJ/FTC Merger Guidelines.  X-x"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  X-suppliers for the prime time of Fall, 1994, 1977, and 1970, respectively.M u S-ԍ#&a\  P6G;&P# See Comments of FTC Staff at 1517, Tables 35. In each year, they listed twenty suppliers. No single supplier in any of those years had a market share of as  X_-much as 20 percent. The markets were essentially unconcentrated.N_| u S-ԍ #&a\  P6G;&P#The HHIs reported by the FTC Staff ranged from 430 to 1063. None of the suppliers, either acting alone or together, could exercise undue market power. Data provided by the EI  X1-Study and the LECG Study essentially confirm this conclusion.EO 1u S-ԍ #&a\  P6G;&P#The EI Study at Appendix A, Table A11, shows that ABC, CBS, and NBC together have not produced in any given year more than 8 percent of the hours aired as primetime entertainment series during the period from 1969/70 through 1993/94. Until the 1990s, they had not aired more than 3 percent. In Appendix E, the EI Study lists the names of suppliers (or packagers) of primetime entertainment series to the three networks for the period 1969/70 through 1993/94; in no year was that list shorter than 26 names. Two facts about these "suppliers" should be noted. First, they may or may not be individual producers. Second, these are the suppliers with programs on the air in prime time. The actual list of potential suppliers willing to provide prime time series would no doubt be much larger. Thus, it is likely that EI's list of suppliers understates the actual number of producers in the market to provide prime time series. x More generally, the EI Study identified 1399 production companies producing shows that were either broadcast or carried on cable in 1994. The networks were three of many producers, whether one considers network primetime only or the entire programming day. xThe LECG Study also calculates HHIs for broadcast programming. LECG's 1993 HHIs for various dayparts were: prime time broadcasts (all days) 1540; prime time broadcasts (weekdays) 1347; and total day broadcasts 854. Based on Commission calculations of LECG data, the HHI for  S~%-prime time access period broadcasts (weekdays) was 1705. See LECG Study, Tables II.1 through II.4. In short, LECG's HHIs also indicated that the supply side of the video programming production market was either moderately concentrated or unconcentrated.E Moreover, comments filed"1O0*((C" by the Staff of the FTC's Bureau of Economics ("FTC Staff"), at 13, note that the minimum  X-efficient scale of production in this market is low.Pu Sb-ԍ #&a\  P6G;&P# In its filing the FTC Staff shows, in Tables 3, 4, and 5, that the smallest companies in video programming production in 1994, 1977, and 1970, respectively, had market shares of network programming hours ranging from 0.9 to 1.6 percent. The FTC Staff Comments at 13 conclude therefore that the minimum efficient scale of production in this market was low. Thus, entry is not limited to very large companies. As the FTC Staff documents, small companies can enter and successfully sell prime-time programs. This ease of entry on a small scale adds to the difficulty of large firms attempting to exercise market power. Therefore, entry is not impeded by significantly high production costs. The FTC Staff also states that there are no other obvious  X-impediments to entry and growth by new suppliers of programming.:Q<xu S -ԍ#&a\  P6G;&P# Satellite technology significantly reduced the average costs of program distribution, thereby  S -facilitating entry into this market. Previously, networks had leased AT&T microwave facilities. See  S -Network Inquiry Study at I11314 & n.254. See also Joel B. Dirlam and Alfred E. Kahn, "The Merits of Reserving the CostSavings from Domestic Communications Satellites for Support of Educational Television," 77 Yale L. J. 494 (1968).:  X-x#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. x37. 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  X -their financial interests in program production and distribution.gR | u S-ԍ#&a\  P6G;&P# WW Study at 79.g The WW Study points to the possibility that vertical integration is being driven by a "land rush" for the fixed supply of  X -programming resources (e.g., film archives, experienced programming talent). According to WW, this poses the danger of foreclosing unintegrated producers from the program production  X{-market and deterring new entrants into the market.cS{u SH-ԍ#&a\  P6G;&P# WW Study at 3842.c x38. 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  X-to amass such market power."iTu S^&-ԍ#&a\  P6G;&P# WW Study at 3940.i In addition, our measures of market concentration in video programming distribution and production do not suggest that firms can exercise undue market"\T0*(("  X-power there.vU|u Sy-ԍ#&a\  P6G;&P# In Fruehauf Corp. v. FTC, 603 F.2d 345 (2d Cir. 1979), the court rejected the foreclosure theory absent very high market concentration in one stage of production. The 1992 DOJ/FTC Merger Guidelines reflect the notion that vertical mergers often generate important efficiencies and cannot  S-present a competitive problem unless one stage is highly concentrated, i.e., exhibit an HHI above  S-1800. See also Comanor, "Vertical Mergers, Market Power, and the Antitrust Laws," 57 Amer. Econ.  S-Rev. 254, 265 (1967); Robert Bork, The Antitrust Paradox (Basic Books 1978); Peltzman, "Public  S-Policy Toward Vertical Mergers," in J.F. Weston and S. Peltzman, eds., Public Policy toward Mergers (Goodyear Publishing Company 1969); Perry, "Vertical Integration: Determinants and Effects," in  SC -Richard Schmalensee and Robert Willig, eds, Handbook of Industrial Organization, Vol 1, Ch. 4, at 183255 (Elsevier Science Publishers B.V. 1989).v 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  X-interest.Vb u S -ԍ#&a\  P6G;&P# Antitrust authorities generally consider vertical integration to be competitively neutral or benign in the absence of evidence of market power at some relevant stage of the vertical ownership chain.  S?-See P. Areeda & D. Turner, Antitrust Law, Vol. III,  724 at 195 (1978). The record indicates that the networks do not dominate at any of these stages. Indeed, vertical integration can provide greater efficiencies and better service to the consumer.  Xv-C.xThe National Television Advertising Market  X_-    XH- x$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  X -audiences for advertisers."gW 6u S-ԍ LECG Study at 11, 21. See also INTV Comments at 3940.g The LECG Study asserts that the three networks dominate the  X -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  X -declined throughout this period.bX u S`-ԍ#&a\  P6G;&P# LECG Study at 22.b 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  X}-readily explained by these two factors, rather than undue network market power.{Y}xu S"-ԍ #&a\  P6G;&P#See EI Supplementary Study at 4345.{ 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 onequarter from 19.1  X8-percent in 1970 to 14.6 percent in 1993 . The record further shows that even if the market is  X!-defined more narrowly as national television advertising less national spot sales, each"!Y0*(( "  X-network's share is less than 23 percent .~Zu Sy-ԍ #&a\  P6G;&P#See EI Study at 20, App. A, Table A10.~ 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  X-they could exercise undue market power either individually or acting together.[" ju S-ԍ#&a\  P6G;&P# The national television advertising market examined in the EI Study includes network television advertising revenue, national spot television advertising revenue, national cable television advertising  S-revenue, and national syndication television advertising revenue. See EI Study, Table A10. Commission calculations suggest that this large market would be unconcentrated, with an HHI of less than 1000, assuming that all nonnetwork advertisers are sufficiently small that they contribute little or nothing to market concentration. We believe this to be a reasonable assumption. xThe narrower market, measured by national television advertising revenues less national spot sales, would be moderately concentrated with an HHI of approximately 16001700. This is a Commission estimate based on market shares for each network of 23 percent with an estimated additional increment to the HHI of no more 100 points from all other national television advertising outlets. Our hypothesis is, again, that no single advertising outlet other than a broadcast network is likely to have a significant market share in this narrower advertising market.  X-x%38. In any event, as the EI Supplementary Study, at 4041, points out, PTAR was not adopted to address the structure or performance of the advertising industry. This is why the  Xv-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  X -in these markets.\& T u S-ԍ#&a\  P6G;&P# The Commission is examining the television advertising market in its pending proceeding  S-concerning its television ownership rules. TV Ownership Notice, 10 FCC Rcd at 3541. It is also examining this market in its review of two of its network rules concerning network control of station  S}-advertising rates and network representation of affiliates in selling nonnetwork advertising. Notice of  SW-Proposed Rule Making in MM Docket No. 9590, FCC 95226, released June 14, 1995. These two proceedings may shed greater light on the structure of the television advertising market than the limited record presented to us by LECG in the instant proceeding. A more complete record developed in these proceedings conceivably could lead us to alter the conclusion we reach here about network power in this market and warrant modifying our ownership rules and the two network rules accordingly. This, however, would not provide a basis for continuing PTAR. As we have noted, we do not believe PTAR is an appropriate regulatory vehicle for addressing concerns about network power in the television advertising market. "B\0*((j"ԌgV. THE COSTS OF PTAR  X-x&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 offnetwork programming during the access period. While these affiliates urge the retention of the network restriction, they call for repeal of the offnetwork provision because it "now actually serves to frustrate the accomplishment of one of the rule's central  X1-objectives: namely, the maximization of programming choices for local licensees."e]1u S -ԍ#&a\  P6G;&P# NASA Comments at 13.e The WW Study describes how the offnetwork restriction interferes with the smooth functioning of the  X -networkaffiliate relationship by raising the overall costs of network broadcasting.)^ hu S-ԍ #&a\  P6G;&P# WW Study at 256. For a brief summary of the efficiencies of television networks, see Owen  S-and Wildman, Video Economics at 20610. See also Comments of FTC Staff at 710.) With PTAR in place, the affiliate must either make investments to produce programs itself, or it must purchase firstrun 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 firstrun programming will perform relative to knowntobepopular 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.  XK-x'40. PTAR harms not only networks and affiliates, but the producers of network programming. The offnetwork restriction has had the unintended effect of discouraging investment in primetime programming. Producers rely to a great extent on their ability to  X-sell reruns of their programs i.e., offnetwork programs to recoup their costs and to earn a profit. The license fee the networks pay for the right to air primetime 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  X-costs, resulting in production deficits for network programming. i_u SA-ԍ#&a\  P6G;&P# Coalition Comments at 9.i The offnetwork restriction, however, diminishes producers' ability to recoup costs by artificially restraining the prices of offnetwork 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 XP-network shows are reduced.q`>Pu S#-ԍ#&a\  P6G;&P# The Coalition argues that the impact of the offnetwork restriction can be seen by comparing a  S]$-Fox program, which is not subject to PTAR, and an ABC program: "In 1991, . . . Fox's Married ...  S7%-With Children garnered syndication fees of approximately $2.4 million per episode. In contrast,  S&-ABC's Roseanne, a similar program in terms of demographics and ratings earned $1.8 million per  S&-episode just one year later." Coalition Comments at iv.q PTAR provides a corresponding subsidy to producers of first"P `0*(("ԫrun 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.  X-x(41. Reduced prices for offnetwork shows will naturally have the effect of lowering the return on network programming, thus reducing the quantity and quality of such programming that a nonPTAR 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.  X -x)42. We are persuaded by WW that by reducing the prices of offnetwork programming, PTAR's offnetwork restriction also tends to reduce the quality of primetime  X-series.au S -ԍ #&a\  P6G;&P# See WW Study at 26; Comments of FTC Staff at 2326; see also EI Study at 45. WW assumes, as is conventional among economists, that the perepisode production  Xy-cost of a series may be one measure of program quality.cbyju S-ԍ #&a\  P6G;&P# See Owen and Wildman, Video Economics at 144145: "One would expect that viewers will find programs with large budgets more appealing than programs with small budgets, because program producers will spend the additional production dollars on things that viewers like. Spending more to get more popular actors, better script writers and directors, and more sophisticated special effects will generally result in a more popular program or film. If it were not possible to increase a program's audience appeal by increasing its budget, profitmaximizing producers would never produce the large budget productions ($1,000,000 per hour and more) we see on primetime network television. If, say, a $700,000 program would be just as popular, networks would demand the latter."c Focussing therefore on this single  Xb-(and quantitative) measure of quality and not on program content per se for a given quantity of primetime programming, an increase in quality will increase the series' incremental  X6-advertising revenue when the quality improvement increases the size of the series' audience.jc6 u S-ԍ #&a\  P6G;&P#See id. at 145146.j 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 offnetwork restriction is eliminated because programmers can use that quality increase to expand audiences and advertising revenues.  X-x*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"P c0*((" resulted in viewers turning off their televisions or watching lesspreferred shows during the  X-access period.mdu Sb-ԍ #&a\  P6G;&P#See EI Study at 3240.m This loss is an economic cost to society because PTAR thereby lowered the wellbeing or welfare of those viewers. EI estimates the monetary value of that welfare loss  X-at more than $200 billion dollars.me ju S-ԍ #&a\  P6G;&P# See EI Study at 41. The notion of a welfare loss derives from the concept of "consumer surplus." Consumer surplus represents the dollar value that a consumer would pay for a good or service over and above the price he or she actually must pay to obtain that good or service. There is a consumer surplus on the part of broadcast television viewers even though the explicit price for viewing is zero. The surplus simply represents the dollars that the consumer would pay if the broadcaster could charge the consumer his maximum willingnesstopay for that program. By denying viewers programs that they desire, society effectively loses that consumer surplus. If viewers can be induced to watch lesspreferred programs, then a loss remains, albeit having been somewhat reduced by the dollar value of the consumer surplus of the viewer for the lesspreferred program. Consumer surplus is a valuation technique that has frequently been used in economic analysis of the television industry.  SH-See, e.g., Owen and Wildman, Video Economics at 334 n. 8. See also Roger Noll, Merton Peck, and  S"-John McGowan, Economic Aspects of Television Regulation, App. A (1973). For a fuller explanation  S-of consumer surplus, see F. M. Scherer and David Ross, Industrial Market Structure and Economic  S-Performance 2129 (1990). xEI's estimation method relies upon the study of viewer valuations of broadcast network and  S-independent signals conducted in the late 1960s by Noll, Peck and McGowan, supra. Noll et al. constructed a model of viewer welfare based on a sample of cable systems in 1969. Using  S:-econometric techniques to estimate the model, Noll et al. concluded that the total consumer surplus associated with programs broadcast by network affiliates was larger than the total consumer surplus associated with programs broadcast by independent stations. Specifically, EI relied upon Table A2 in  S-Noll et al. showing that the total surplus associated with receiving signals from three network affiliates was equivalent to 5.07 percent of household total income while the total surplus associated with receiving signals from three independent broadcast stations was equivalent to 1.34 percent of total household income. The difference (3.73 percent of household income) between these two numbers represents, according to EI, the loss of welfare (consumer surplus) imposed on a household by being required to watch only independent broadcasts instead of network broadcasts. Multiplying this percentage by the value of network programming represented by the access period indicates that PTAR imposed a reduction of consumer surplus equal to 0.3 percent of total viewer income. Multiplying this figure by total television household income in 1971 results in a loss of $2.5 billion per year. Adjusted for inflation, this amounts to $8.5 billion in 1994 dollars. Multiplying $8.5 billion times 25 years (the length of time PTAR has been in place) results in an estimated total welfare loss of more than $200 billion. (See Appendix J of the EI Study for a full explanation of EI's calculation of the $200 billion welfare loss.) xThis estimate is somewhat problematic since it ignores increasing household income since 1971 (which would increase the size of the estimated loss). It also ignores the growth of cable networks which should serve to reduce the difference in valuation placed by households on network  SF%-affiliate signals over independent signals (i.e., as we've stated elsewhere, cable growth and other developments have significantly reduced any signal handicap associated with UHF independent signals).m ",$e0*(("Ԍ X-ԙx+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  X-zero. We disagree with WW's statistical analysis and reject its conclusion.ufu SK-ԍ #&a\  P6G;&P#The EI Study bases its $200 billion estimated welfare loss on differences in viewers' valuations of overtheair signals from network affiliates and from independent stations using data  S-from the late 1960s. Noll et al., supra, estimate the value placed by viewers on three affiliates's signals at 5.07 percent of household income and, similarly, the value for three independents' signals at 1.34 percent of household income. xIn their Reply Comments at 43, WW argue that, because the 95 percent confidence intervals for these two estimates overlap, we cannot be certain that there is any statistically significant difference between them. (The interval surrounding 5.07 percent runs from 2.61 to 7.41 percent while the interval for 1.34 percent runs from 0.16 to 2.80 percent.) Thus, according to WW, the EI Study's $200 billion welfare loss is not statistically distinguishable from zero. xThe Commission concludes that WW has provided some reason for skepticism about the size of EI's estimated welfare loss. However, WW's demonstration that the confidence intervals overlap, while instructive, is not compelling. First, WW's confidence intervals are approximate and not exact. (We do not know that the underlying random variables are normally distributed and the sample size of  S-cable delivery systems used by Noll et al. is not very large.) Second, the extent of overlap is slight  S-(0.19 percent) rather than substantial. Therefore, the underlying study by Noll et al. does provide reasonable evidence that viewers in the late 1960s placed a higher value on the networks' programming (provided through their affiliates) as compared to the value placed by viewers on programming broadcast by independent television stations.u However, the WW Study also asserts that, because EI's analysis rested upon a twentyfive year old study, it  X-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 overtheair 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.  X -x,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 offnetwork 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. "f0*((6"Ԍ< VI. ANALYZING THE PUBLIC INTEREST NEED FOR PTAR  X-A.xIncreasing Opportunities for Independent Programmers  X-x-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  X_-to affiliates (caused by PTAR's ban on network and offnetwork programming) would provide independent producers greater access to the primetime 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.  X -#Xj\  P6G; XP#x.47. A number of parties argue that PTAR has failed to promote these goals.g u SN-ԍ#&a\  P6G;&P# See NBC Comments at 1319; EI Study at 5963.Ċ They point out that four companies Paramount, Warner Brothers, Fox, and King World distribute over 95 percent of the firstrun syndicated programming aired during the PTAR access period. The first three are major Hollywood studios that have been major suppliers of  Xy-prime time programming both before and after PTAR. h8yju S-ԍ#&a\  P6G;&P# These three studios accounted for 17.5 percent of the entertainment series programs supplied to the three networks during the 196970 season immediately prior to PTAR's adoption. They accounted  SD-for 21.7 percent of such programming during the 199394 season. Comments of NBC at 16 n.6; EI Study at 5960, App. E; Coalition Comments, Fig. 2. Each of these companies has also started its own broadcast network. Comments of NBC at 1516.  King World is a new entrant to the market since PTAR's adoption, and in fact is the leading supplier of access period firstrun  XK-programming. But its two most popular programs Wheel of Fortune and Jeopardy got  X6-their start as network programs and then went into firstrun syndication.qi6ju SQ-ԍ#&a\  P6G;&P# See Comments of NBC at 17.q Putting aside the  X!-question of who distributes access period programming, opponents of the rule also argue that  X -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  X-programs now than there were prior to PTAR.Kj u S -ԍ#&a\  P6G;&P# EI Study at App. E; Comments of NBC at 19. The EI Study, at 92, defines suppliers or "packagers" as "the entity that assumed contractual responsibility to a network for production or delivery of a series." The ups and downs in the number of packagers of prime time programming, however, may very well be attributable more to the inherent riskiness of the program production industry than to any potential or actual anticompetitive effects of PTAR. For example, the number of packagers dropped to 26 in 1985-86 and rose to 35 in 1992-93. We also observe that the identity of packagers varies from year to year. This suggests that the list for any given year does not represent  S&-all program suppliers willing and able to sell programs to the networks. See supra note 73. We further note that, despite the "trend" seen by EI, the video programming market is not even moderately"_'i0*(('"  S-concentrated. See supra Section IV.B.K"jj0*((r"Ԍ X-ԙx/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 primetime quality programs" such as the dramas, comedies, and  X-documentaries provided by the networks to their affiliates during prime time.kju S-ԍ#n6X@`7Fc&@##&a\  P6G;&P# Network Inquiry Study, Vol. II at 737. See also FTC Staff Comments at 28. Rather, the great majority of firstrun syndicated programming during the access period is made up of  X-game shows and news magazine shows.Fl> u SJ -ԍ#&a\  P6G;&P# EI Study at 61. The following were the distributors and their firstrun syndicated programs  S" -that aired on the Top 50 Market Affiliates in November 1994: King World Wheel of Fortune,  S -Jeopardy, Inside Edition, American Journal; Paramount Entertainment Tonight, Hard Copy, Price is  S -Right; Warner Brothers Extra; Fox Current Affair; and Genesis Real Stories Highway Patrol. Coalition Comments at Exh. 2.F Both these programming formats existed prior to  Xv-PTAR and are available in other dayparts.`mv u S9-ԍ#&a\  P6G;&P# EI Study at 61.` Most of these programs are also "stripped," i.e., the same program airs each weekday night, with a different game, edition or episode shown  XJ-each night.`nJ u S-ԍ#&a\  P6G;&P# EI Study at 61.` 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  X -highcost programming."_o R u S-ԍ#&a\  P6G;&P# Krattenmaker & Powe, Regulating Broadcast Programming at 73. See also National Ass'n of  S-Indep. Television Producers & Distrib. v. FCC, 516 F.2d at 533 ("[T]he degree of diversity in programming for access time has been disappointing."). _  X -x049. 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 firstrun producers gain in the access period from PTAR may help them finance firstrun shows  X-that air in other dayparts and thus leads to greater diversity in this respect.tpu Sv$-ԍ#&a\  P6G;&P# See FTC Staff Comments at 28.t In fact, the syndication market as a whole has produced an increasing number of new firstrun programs,"Hp0*(( "  X-growing from 45 firstrun syndicated programs sold in 1970 to 250 in 1990.qu Sy-ԍ#n6X@`7Fc&@##&a\  P6G;&P# Notice, 9 FCC Rcd at 6340. 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.  X-x150. Mindful of these issues, we turn to the critical question of whether PTAR is  X-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  XJ-syndicators" or "to smooth the path for existing syndicators."rJju Se -ԍ#&a\  P6G;&P# PTAR I, 23 FCC 2d at 397.#Xj\  P6G; XP#ї Rather, the central objective of the rule was to provide "opportunity . . . for the competitive development of alternate  X -sources of television programs."Zs u S-ԍ#&a\  P6G;&P# Id.Z  X -x251. 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  Xd-public required a greater array of producers than the market would normally bear."tdu S-ԍ#&a\  P6G;&P# Fin/Syn Second R&O, 8 FCC Rcd at 330203. As in the fin/syn proceeding, "[n]o party . . . has provided any reasoned justification for such a  X6-result here."cu6Pu S7-ԍ#&a\  P6G;&P# Id. at 3303.c  X-x352. 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  X9-percent of the entertainment programs they distribute to affiliates .v9u S&-ԍ#&a\  P6G;&P# Comments of NBC at 1314; EI Study at 106, Table E25. The healthy demand for"9 v0*((" 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  X-broadcast or carried on cable in 1994.~wu SK-ԍ#&a\  P6G;&P# EI Study at 24;  id. at 10724, App. F.~  X-x453. Repeal of PTAR will subject suppliers of firstrun 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 offnetwork program during this period, or demand that the firstrun syndicator lower its price to induce the station to carry its programming rather than offnetwork fare. This competition in today's marketplace can provide incentives to provide more innovative, higher quality programming, all of which benefits the consumer.  X -x554. Repeal of PTAR will also eliminate the costs generated by the rule, which we have described in Section V. Most importantly, prices for offnetwork programming will no longer be artificially constrained, which we expect will encourage investment in the production of network programming.  Xy-x655. Proponents of the rule have not provided any evidence to support their claims that this competition will "destroy the market for firstrun nonnetwork syndicated  XK-programming."kxKju Sf-ԍ#&a\  P6G;&P# INTV Reply Comments at 30.k To the contrary, the record indicates that firstrun programming is quite popular. In 1994, 181 firstrun syndicated programs were broadcast, and 18 of the 25 most  X-popular syndicated programs were firstrun.iy u S-ԍ#&a\  P6G;&P# Coalition Comments at 7.i Satellite delivery is now available to nonnetwork suppliers, reducing their distribution costs, previously a disadvantage compared to network distribution to affiliates. Indeed, we concluded in the fin/syn proceeding that "first X-run increasingly is a fully comparable alternative to network distribution."}zu S3-ԍ#&a\  P6G;&P# Fin/Syn Second R&O, 8 FCC Rcd at 3306.}  X-x756. The record suggests that many Top 50 Market Affiliates may very well continue to broadcast firstrun syndicated programming during the access hour even without PTAR.  X|-Firstrun programming often attracts larger audiences than offnetwork fare.{|Lu Sy"-ԍ#&a\  P6G;&P# For example, the LECG Study at 84, looked at the November 1993 ratings for markets 5160, the largest nonPTAR markets. In those markets, the average rating for firstrun programs was 12.4, compared to only 7.2 for offnetwork programs. In addition, according to data provided by INTV, in markets 1100, on VHF affiliates, firstrun syndicated programming in the access period in November 1993 had an average rating of 12.0 versus an average of 8.7 for offnetwork programs. Similarly, INTV asserts that offnetwork programs on UHF affiliates had an average rating of 5.2 versus a 9.6 rating for firstrun programs. INTV Comments at 68 n.116. Indeed, a"| {0*((" number of the Top 50 Market Affiliates have recently made longterm commitments to renew firstrun syndicated programming they presently carry even though they were aware of the  X-Commission's review of PTAR.|u SK-ԍ#&a\  P6G;&P# See Coalition Reply Comments at 9, stating that CapCities/ABC's owned stations have recently  S%-reaffirmed their commitment to license Wheel of Fortune and Jeopardy until 2000, and that three  S-CBSowned stations have renewed Entertainment Tonight through 1999. The performance of programs that formerly aired on the Fox network (which are not subject to the offnetwork restriction) also indicates that firstrun programming can compete against offnetwork programs. According to the Coalition, "only  X-four of the stations in the Top 50 markets that purchased the successful offFox show Married  Xx-. . . With Children were ABC, CBS or NBC affiliates. In total, only 13 stations in the Top 50  Xc-markets selected offFox shows."r}cu S2 -ԍ#&a\  P6G;&P# Coalition Reply Comments at 910.r  X5-x857. In addition, firstrun syndicated programming makes up 76 percent of all access hour syndicated programming broadcast by network affiliates in markets 51100 which are not  X -subject to PTAR.A~ u Sv-ԍ#&a\  P6G;&P# Coalition Reply Comments at 8 (citing Nielsen Station Index, Nov. 1994). According to the EI Study, at 47, Figure 13, firstrun programming in nonPTAR markets accounted for 54 percent of access hours aired by the three network affiliates.A This suggests that there will continue to be a healthy demand by network affiliates for firstrun programming after the repeal of PTAR, including the top 50 markets. The LECG Study, however, argues that programming choices in nonPTAR markets cannot be used to predict the choices that would be made by the Top 50 Market Affiliates in the postPTAR world because top 50 market purchases influence the choices in lower markets. According to LECG, firstrun programming "may be more risky" because such programs "have the potential for higher ratings than offnetwork programs but they also have the  Xf-potential for significantly lower ratings.";f u S%-ԍ LECG Study at 60.; 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  X!-nationwide viability."3! u S-ԍ Id.3 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 postPTAR  X-clearances in all markets."aP u S"-ԍ#&a\  P6G;&P# Id. at 60.a  X-x958. LECG is correct in that syndicated programs need to obtain clearances in a" 0*(("  X-number of the largest markets to be successfully syndicated.Gu Sy-ԍ #&a\  P6G;&P# See Second Fin/Syn R&O, 8 FCC Rcd at 3327 (The success of firstrun programs is contingent "on clearances by the most powerful stations in the top few markets, and . . . on clearances in a large number of markets throughout the country.").G But this does not mean we should discount completely the inferences that can be drawn from current buying patterns in nonPTAR markets. The success of firstrun programs in these markets may have as much to do with factors other than PTAR's effect on the top50 markets. As we have stated, and as LECG concedes, firstrun programming often enjoys higher ratings than offnetwork shows. It may be more popular because it is, after all, new programming rather than reruns. Moreover, as the EI Study points out, firstrun programming generally has lower overall production costs, allowing them to compete effectively against offnetwork programs even  XH-though the latter has recovered a portion of its production costs in the upfront market.Hu S -ԍ#&a\  P6G;&P# According to EI, "[b]roadcasters are concerned with cost per ratings point. . . . In equilibrium, the supply of offnetwork and firstrun syndicated programs should adjust so that marginal programs  S-of each type cost the same per rating point." EI Supplementary Study at 34. See also infra  6063. 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  X -even assuming it were valid.` lu S -ԍ#&a\  P6G;&P# Viacom attempts to discount the relevance of program choices in nonPTAR markets by arguing that firstrun syndicators are able to price more "competitively" in markets 51100 because they earn a substantial portion of their revenues in the Top 50 markets. Viacom Comments at 32. But it offers no evidence to quantify or even substantiate this claim.  X -x:59. To the extent offnetwork or network programming would displace firstrun syndicated programs from the Top 50 Market Affiliates, firstrun programs should be able to  X -find a place on independent stations, not to mention other outlets such as cable.d u S-ԍ#&a\  P6G;&P# Proponents of the rule argue that independent UHF stations do not provide a sufficient  S-alternative outlet because of the UHF signal disadvantage relative to VHF stations. See INTV  S-Comments at 65. In Section VI.B.1, infra, however, we find that this disadvantage has been significantly reduced. To the extent it does exist, it does not justify continuation of PTAR. In such an event, independent stations will have an incentive to air firstrun programming to  Xy-counter-program the affiliate's programming ; an independent station will be motivated to air,  Xb-for example, such programs as Hard Copy in response to the affiliate who shows reruns of  XM-Cheers. Indeed, many independents already broadcast firstrun programs in prime time opposite network broadcasts; among nonFox independent stations in the top50 markets, 39  X!-percent of prime time hours were firstrun syndication.c!u S$-ԍ #&a\  P6G;&P# EI Study at 4950.c  X-x;60. A number of PTAR proponents, citing the LECG Study, argue that repeal of PTAR will harm viewers because network affiliates will substitute lesspopular but more"!`0*((" profitable offnetwork programs for firstrun shows. They argue that firstrun syndicated programming is handicapped in competing with offnetwork programming because producers of firstrun syndicated programs must recover all of their variable and development costs from the syndication market. In contrast, according to these parties, producers of offnetwork programs have already recovered much of their development costs through the firstrun licensing fees they earn from the networks. Thus, offnetwork programs need only be priced to cover their variable costs and their unrecovered development costs. Affiliates will consequently replace more popular firstrun syndicated programs with equally or less popular offnetwork programs because the latter result in greater profits because of their cost  X1-advantage. h1u S -ԍ#&a\  P6G;&P# INTV Comments at 4751.h  X -x<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  X -those goods.x hu S-ԍ#&a\  P6G;&P# See EI Supplementary Study at 33.x In any event, the record indicates that the costs of offnetwork shows, including unrecovered production costs, and the costs of firstrun syndicated programming are comparable. As EI points out, according to LECG's own data, the average offnetwork  Xb-syndicated program has unrecovered production costs of approximately $90,000 per episode.3b u S-ԍ Id.3 This is comparable to the perepisode production costs of the average firstrun syndicated  X4-program, which LECG estimates at $70,000 to $100,000 per episode.f4u S-ԍ#&a\  P6G;&P# LECG Study at 64, 71.f The unrecovered production costs of offnetwork shows cannot be dismissed as "sunk costs," because producers have come to rely on offnetwork 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 offnetwork programming entails distribution costs as well as any residual payments and royalty costs that  X-must be made when a show is successfully syndicated.qLu S -ԍ#&a\  P6G;&P# Coalition Reply Comments at 67.q Thus, offnetwork shows do not appear to have any cost or profit advantage relative to firstrun syndicated programming. We consequently find no evidence that firstrun programming suffers an inherent disadvantage relative to offnetwork programming that requires continuation of PTAR.  X7-x=62. WW's reply comments also take issue with LECG's conclusions concerning the"7"0*(("  X-advantage of offnetwork programs over firstrun syndication.vu Sy-ԍ #&a\  P6G;&P#See WW Reply Comments at 1216.v 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 onetime 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 offnetwork programs. WW shows, moreover, that even within LECG's static, monopsony framework, offnetwork distributors do not have an inherent cost disadvantage that would permit them to outbid firstrun syndicators.  X1-x>63. WW, in their reply comments, rebut LECG's argument by using the book  X -publishing industry as an analogy.B ju S5 -ԍ WW Reply Comments at 16.B Expected revenues from new books must cover their development, production and distribution costs. Few new books are commercially successful. There is, of course, no PTARtype 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  Xb-as the new book publishers entering the market each year.Lb u S-ԍ See WW Reply Comments at 16.L Just as a PTARtype regulation is not necessary for book publishing, PTAR is no longer necessary to provide a competitive advantage to independent programmers for television.  X-B.XxFostering the Growth of Independent Stations and New Networks(#  X-x?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  XN-development of UHF should be benefited."pNu S"-ԍ#&a\  P6G;&P# PTAR I, 23 FCC 2d at 395.p 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.  X-x@65. Representatives of independent stations and one of the new networks, however,"#N0*((;" argue that PTAR continues to be necessary in providing independent stations with competitive  X-advantages over competing network affiliates.du Sb-ԍ#&a\  P6G;&P# See, e.g., Comments of INTV, Viacom. See also Comments of MAP/PAW; SBA Chief Counsel. Viacom, through its subsidiary Paramount Pictures, holds a contingent ownership interest in UPN. Paramount is also the second largest distributor of access period firstrun programming to the  S-Top 50 Market Affiliates. See Coalition Comments, Exh. 2; FTC Staff Comments at 27. One advantage is that independent stations in the top50 markets have access to lower priced offnetwork 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.  X_-xA66. 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  X1-would deteriorate materially if the rule or the offnetwork provision were repealed."e1u S-ԍ#&a\  P6G;&P# INTV Comments at 40.e Its comments focus primarily on the offnetwork provision, arguing that elimination of this aspect of the rule would force independent stations to pay more for offnetwork programming and  X -possibly be outbid for it.d u S1-ԍ#&a\  P6G;&P# Id. at 5154.d According to INTV, this would reduce the ratings and revenues of independent stations, which would in turn "undermine and reduce their abilities to provide  X -public interest programming," including news and public affairs programming.d 6u S-ԍ#&a\  P6G;&P# Id. at 5460.d  X-xB67. 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  XK-will never become strong, competitive media voices in the broadcast marketplace."?K u S-ԍ Viacom Comments at 3.? 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  X-the difference between economic viability and going dark for many of those UHF stations."bx u S"-ԍ#&a\  P6G;&P# Id. at 14.b 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 primetime period. WB, the other "new network,"  X-did not submit comments in response to the Notice arguing that PTAR is necessary for the"$ 0*((o"  X-success of the new networks.Uu Sy-ԍ#&a\  P6G;&P# MPAA, representing a number of companies including Warner Brothers, filed comments advocating the retention of the network restriction but expressly declined to address whether the offnetwork provision of the rule should be continued. MPAA Comments at 2 n.3.U  X-xC68. ABC, CBS, and NBC, their affiliates, and the Coalition dispute these claims.u S-ԍ#&a\  P6G;&P# The EI and WW Studies were submitted in support of this position. 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  X_-objection to repeal of the Prime Time Access Rule."i_u S -ԍ#&a\  P6G;&P# Fox Reply Comments at 1.i  X1-xD69. We have noted the importance of offnetwork programming to the access period  X -ratings of independent stations. Xu S#-ԍ#&a\  P6G;&P# Fin/Syn Second R&O, 8 FCC Rcd at 8294 n.64. Moreover, the value to independent stations of popular offnetwork programming is not limited to the immediate effects during the time the particular program is aired. Rather, the proponents of PTAR have observed that success during the access period which is enhanced by airing popular offnetwork fare enables the station to carry over audience viewership into adjacent prime time hours. The Coalition argues, however, that certain firstrun syndicated programming can provide this same carryover effect given its high ratings.  S5-Coalition Reply Comments at 11; see also Viacom Comments at 2326. But the record does not conclusively show that repeal of either the offnetwork 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.  X-xE70. The number of independent television stations has grown by almost 450 percent  Xy-since PTAR was adopted, from 82 stations in 1970 to over 450 today.By u S6-ԍ See supra  27.B We agree with INTV that "[n]o one may deny that independent television has grown and prospered since"  XK-adoption of the rule.eKu S"-ԍ#&a\  P6G;&P# INTV Comments at 22.e 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"%N0*((" 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 offnetwork programming and in  X-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.  X -xF71. 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 offnetwork 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.  Xb-xG72. 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  X4-commenters: First, does the record show that the "UHF handicap" warrants affording  X-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  X-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.  X-,1. The UHF Handicapă  Xm-xH73. Proponents of the rule seek to justify PTAR by pointing to the signal reach  XV-disadvantage of UHF stations relative to VHF stations.Vu S-ԍ#&a\  P6G;&P# See Viacom Comments at 911; INTV Comments at 2325; INTV Reply Comments at 1112. 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.  X-xI74. 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: XxFrom a technical perspective, the ability of the UHF television service to"p$&j0*((F#" 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 AllChannel 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 allchannel 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  X -VHF and UHF stations. These developments substantially alleviated the  X-technical disadvantages faced by UHF television receivers . . . .u S -ԍ #&a\  P6G;&P#See Report and Order in MM Docket No. 91221, FCC 9597, at  20 (March 7, 1995). [Emphasis added.]   XO-xJ75. 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.  X -television households. ju S%-ԍ These are Commission calculations based on information contained in the 1971/72 Television  S-& Cable Factbook and the April 10, 1995 issue of Broadcasting & Cable at 89. 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  X-stations by increasing the potential audience for UHF stations.")u Ss-ԍ #&a\  P6G;&P#See Florence Setzer & Jonathan Levy, "Broadcast Television in a Multichannel Marketplace,"  SM-OPT Working Paper No. 26, 6 FCC Rcd 3996, 4012 (1991). See also FTC Staff Comments at 3132.) Indeed, the growth of  X-independent stations over the years seems to track closely the growth in cable penetration.bu S-ԍ#&a\  P6G;&P# See EI Study, Figures 2 and 3, at 8 and 10. Nonetheless, the disparity between UHF and VHF remains for a portion of the now approximately onethird of viewers that do not subscribe to cable.  Xi-xK76. 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  X;-UHF signal disadvantage.z; u S&-ԍ #&a\  P6G;&P# See EI Study at 9, App. C at 8388.z The EI Study updates an earlier study conducted by R. E. Park";' 0*((" 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  X- 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  X_-sampling, anomalous results, and failure to distinguish between local and distant signals._u S-ԍ #&a\  P6G;&P# See INTV Reply Comments at 812, Exh. 1 at 69. After review of these arguments in Appendix B, we conclude that EI's study provides additional evidence that cable has reduced the UHF handicap.  X -xL77. We disagree with INTV that cable may not necessarily extend a UHF station's coverage to areas not already reached by the station's overtheair signal. At present, local commercial broadcast stations generally are entitled to mandatory carriage on cable systems  X -throughout their television market without regard to overtheair signal coverage. Further, a broadcast station's inclusion within a particular television market is a reflection of where a  X-station actually competes for viewers and revenues with other marketarea stations.8ju S-ԍ#&a\  P6G;&P# 47 C.F.R.  76.55(e). See also Report and Order in MM Docket 92259 (Broadcast Signal  S-Carriage), 8 FCC Rcd 2965, 297578 (1993), recon. granted on other grounds, 9 FCC Rcd 6723 (1994). In this regard, the Commission is able to, among other things, add or subtract communities  S9-from a television station's market to better reflect marketplace conditions. Id. Moreover, any signal deficiency adversely affecting the provision of cable carriage where a station is entitled to such carriage may be overcome by the provision of an appropriate signal directly to the cable headend, thus overcoming any signal disparity for cable viewers. 47 C.F.R.  76.55(c)(3).8 Retention or repeal of PTAR does not alter the mustcarry status of any station.  XM-xM78. However, although cable has reduced the UHF handicap, we understand that it  X6-may still affect some portion of viewers who are not cable subscribers.6 u S-ԍ#&a\  P6G;&P##&a\  P6G;&P# See INTV Reply Comments, Exh. A at 7. INTV argues that cable does not offset the UHF handicap for the onethird of viewers who are not cable  X-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 overtheair 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 noncable factors such as improved receiver technology. We also note that cable penetration is quite high even among lowincome 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  X9-and cannot afford cable appears to be relatively low."9( 0*(("Ԍ X-ԙxN79. 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  Xv-stations.bvu S-ԍ#&a\  P6G;&P# In Detroit, for example, PTAR applies to the CBS's WGPR, a UHF station located on Channel  S-62, but not to the Fox affiliate, WJBK, a VHF station located on Channel 2. See Coalition Comments at 2728. In general, PTAR applies to 20 UHF ABC, CBS, and NBC affiliates in the Top 50 PTAR Markets. 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 nonbroadcast sources. We thus conclude that the UHF handicap that remains does not warrant continuation of PTAR.  X -xO80. 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  X -threatened adverse economic impact on existing or potential UHF stations. u Sa-ԍ #&a\  P6G;&P#Report and Order in MM Docket No. 8768, 3 FCC Rcd 638 (1988), clarified, Memorandum  S;-Opinion and Order in MM Docket No. 8768, 4 FCC Rcd 2276 (1989). 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  XK-significantly the technical handicap of the UHF service."bKnu Sj-ԍ #&a\  P6G;&P#Id. at 642.b 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  X-adoption of the UHF impact policy attests to the competitive health of the service."3 u S-ԍ Id.3 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  X-growth of UHF stations.Z u S$#-ԍ#&a\  P6G;&P# Id.Z  X-#Xj\  P6G; XP# "e)T 0*(("Ԍ X-i2. PTAR and the Ratings, Growth, and Profitability of Independent Television Stationsă  X-xP81. 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  X}-stations "going dark," and "stunt the development" of the UPN and WB networks.k}u S-ԍ#&a\  P6G;&P# Viacom Comments at vi, 14.k  XO-xQ82. 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  X -competitors. hu S#-ԍ #&a\  P6G;&P#See also Adam Smith, The Wealth of Nations, Chapter II, Book IV, The Modern Library, New York (1965). 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.  Xk-xR83. 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  X-growth of independent stations.{u Sv&-ԍ#&a\  P6G;&P# See EI Supplementary Study at 1213.{ In addition, the reach of UHF signals has been extended by"*0*(("  X-improvements in television transmitter and receiver equipment design.u Sy-ԍ#&a\  P6G;&P# See Harold L. Vogel, Entertainment Industry Economics 156 (1990). 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  Xv-advertisersupported broadcast television networks, such as Fox."fvju S -ԍ#&a\  P6G;&P# See EI Supplementary Study at 1011. See also Owen and Wildman, Video Economics 180 (1992); Robert Crandall, The Economic Case Against the FCC's Television Network Financial Interest  SC -and Syndication Rules, at 38, Comments filed on June 14, 1990 in response to the Notice of Proposed  S -Rule Making in MM Docket No. 90162.  XH-xS84. 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 overtheair 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  X -advantage visavis PTAR Top 50 Market Affiliates when the latter, along with the networks, face the same competitive pressures from cable.  Xd-xT85. The record does not support the assertion that the repeal of PTAR will reverse the  XM-trends that led to the growth of independent stations.xMu S-ԍ#&a\  P6G;&P# See infra  88 and Appendix C.x 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.  X-xU86. 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  X-that the adoption of each of the two components of PTAR (the three hour network restriction  X-and the offnetwork restriction) increased the ratings of independent stations.z:u Sm#-ԍ#&a\  P6G;&P# See LECG Study, at 50, Figure IV.1.z The same  Xk-analysis also seeks to show that repealing PTAR will result in a 58 percent drop in access period ratings and in a carryover 67 percent drop in the ratings for the first (following) primetime hour for independent television stations. The study examines three periods of time: (1) the prePTAR years, 1966 through 1970; (2) the immediate postPTAR years, 1971"&+ 0*((" through 1976 and 1979; and (3) recent postPTAR years, 1987 and 1993.  X-xV87. The LECG Study's regression analysis reached these conclusions:  X-Xx,44PTAR had a positive and significant effect upon the growth of the  X-number of independent stations in the long run, revealing the effect  Xx-somewhere between 5 to 15 years after PTAR implementation.oxu S-ԍ#&a\  P6G;&P# See LECG Study at 5455.oƤ4  XJ-Xx,44PTAR 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  X -York.o ju S -ԍ #&a\  P6G;&P# See LECG Study at 5155.oƤ4  X -Xx,44The estimated equations can be used to predict the effects of the repeal of PTAR in the period from 19952004. They assume that each of the top 30 markets continues to grow in size to the same extent it did as over the 19661993 period, and that cable penetration by market grows as it did from 19731993.Ƥ4 Xx,44,` ` 1 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 19952004 period. The size of the negative effect will vary over time and across markets, increasing in the smaller markets.x` Xx,44,` ` 1 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.x` Xx,44,` ` 1 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  X-earnings for independent stations.l u S$-ԍ#&a\  P6G;&P# See LECG Study at 48.lx`  X -xW88. 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. "!,0*(( " Cognizant of the resources required to conduct such a largescale study, we nonetheless are  X-concerned with certain problems in LECG's analysis:u Sb-ԍ Appendix C provides a discussion, much of it highly technical, of additional problems which we have identified with the analysis. Xx 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 offnetwork 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.  Xx LECG uses its historical analysis of the effects of PTAR (based largely on  X -data from the 1970s) to predict the effects of repealing PTAR today. This  X-approach ignores the problem of hysteresis.:@u S-ԍ#&a\  P6G;&P# Webster's II New Riverside University Dictionary, 1988, defines hysteresis as "[t]he failure of a property that has been altered by an external agent to return to its original value when the cause of the alteration is removed.": 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 threenetwork broadcast  X-television world of 1970.u S`-ԍ#&a\  P6G;&P# The largest of the new broadcast television networks, Fox, supports repeal of PTAR,  S8-suggesting that Fox does not believe that history will reverse itself. See supra paragraph 68.  Xx 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 nonPTAR 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.(# "N- 0*(("Ԍ X-Xx There are errors and gaps in LECG's datasets.u Sy-ԍ#&a\  P6G;&P# See WW's Reply Comments at 24. WW alleges that stations are misclassified, Canadian stations are included when they are clearly not subject to PTAR, and data are missing for years and stations. For example, many of the independent stations included in the sample failed to meet Nielsen's minimum  X-reporting standards and therefore exhibit zero reported ratings when their actual  X-ratings were, while small, positive.vu S-ԍ#&a\  P6G;&P# See WW Reply Comments at 2425.v  Xx 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  X3-specification itself.s3u S-ԍ#&a\  P6G;&P# See WW Reply Comments at 30.s  Xx 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.   X-xX89. 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  X6-reliable evidence that PTAR has as a historical matter increased independent station ratings.`6^u SE-ԍ#&a\  P6G;&P# According to LECG's analysis, the ratings differential between independent and affiliate stations fell by 4.94 points in 1971 (from 1970) and by 3.97 points in 1976 (from 1974). LECG attributes the former entirely to the impact of PTAR threehour network restriction. LECG attributes the latter to the adoption of PTAR offnetwork restriction. LECG Study at 50, Fig. IV.1.  LECG's analysis simply interprets the decreased ratings differential between independent and  X-affiliated stations as wholly due to the adoption of PTAR.` u S?!-ԍ#&a\  P6G;&P# See LECG Study at 5052. LECG plots average aggregate ratings for each year in the 19661976 period in Figure IV.1 (at 50). They identify drops in rating differentials between independents and affiliates with the timing of the adoption of PTAR's two restrictions.` 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 19661976 period such as government".0*(("  X-mandated improvements in television equipment design that ameliorated the UHF handicap.]u Sy-ԍ#&a\  P6G;&P# LECG argues that they tested for and rejected the importance of cable growth in their regression analysis. They made no such test in their Study at 5052 regarding their examination of ratings differentials over the period 19661976 as displayed in Figure IV.1 at 50.]  X-xY90. 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 reanalysis of the LECG Study's 1993 data in fact shows that the UHF handicap has been eliminated. When LECG's empirical analysis of the offnetwork 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  X -of operation .z u S-ԍ#&a\  P6G;&P# See WW Reply Comments at 23, 3031.z Even under the LECG model, therefore, according to the Coalition, independent stations have had, in the twentyfive years since PTAR, more than enough time  X -to mature.} u S@-ԍ#&a\  P6G;&P# See Coalition Reply Comments at 2627.}  X -xZ91. We further observe that while independent stations will be forced to pay competitive prices for offnetwork programming in the absence of PTAR, they will not  Xy-necessarily be outbid for such programming.vy\u S-ԍ#&a\  P6G;&P# See WW Reply Comments at 1216.v As noted, in markets 51100, 76 percent of syndicated programs aired by network affiliates is firstrun rather than offnetwork. Moreover, in 1993, two of the top five offnetwork programs broadcast in markets 51100  X4-were aired more often on independent stations than on affiliates.s4u S-ԍ#&a\  P6G;&P# Coalition Reply Comments at 2021.s It is also unlikely that all network affiliates in a market will flock to offnetwork shows, given the incentive to counterprogram with different program formats. In addition, in the event the networks and their affiliates opt to run network programming during the access hour, offnetwork fare will continue to be available to independents. Finally, in the event an offnetwork program is displaced from an independent station, the station can turn to firstrun syndicated  X-programming.: u S#-ԍ#&a\  P6G;&P# We recognize that in the fin/syn proceeding we noted that "[w]e also accept the Independent Stations' contention that because of the high cost of firstrun programming and the fact that firstrun shows cannot be "stripped". . ., firstrun material is not a viable alternative to the ratings appeal of  S&-popular offnetwork hits." Fin/Syn MO&O, 8 FCC Rcd at 8294, n.64. The record in this proceeding, however, is much more complete on this question than in the fin/syn proceeding. It indicates that"['0*(('" firstrun syndication does not necessarily suffer a cost disadvantage or a popularity disadvantage to offnetwork programming. Accordingly, the Commission now sees a considerably greater degree of economic substitutability between firstrun and offnetwork programming. Firstrun programming can generate higher ratings than offnetwork shows,"/0*((p" with associated carryover ratings benefits. Many independents air firstrun programs in prime time today; for example, among nonFox independent stations in the top50 markets, 39  X-percent of prime time hours were firstrun syndication.cu S-ԍ #&a\  P6G;&P# EI Study at 4950.c  X-x[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  Xv-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 topfive rated offnetwork program that is (1) a UHF station that is (2) not affiliated with  X -Fox, UPN, or WB, and/or (3) not owned by a company owning three or more stations.r u SW-ԍ#&a\  P6G;&P# NBC Reply Comments at 13, Exh. A.r 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.  X{-x\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 515 years later. However, EI shows that LECG's model can be used to demonstrate that PTAR is not  X -responsible for the increase in the number of independent stations.z Xu S-ԍ#&a\  P6G;&P# See EI Supplementary Study at 610.z 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  X-number of independent stations.u Sp!-ԍ#&a\  P6G;&P# See EI Supplementary Study at 910; LECG Study, Appendix D, Table D.3, at 47. 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  X-number of independent stations increases in the 32nd year, the year 2002.Z` u S$-ԍ#&a\  P6G;&P# The linear form relates the number of independent stations to PTAR's adoption as  S&-Xx,44©0.1T71 + 0.00319T712.Ƥ4 "n'0*(('"ԌSolving for the number of years required to equate the negative effect of T71 with the positive effect  Sh-of T712 yields 31.3 years. Thus, EI concludes that PTAR results in a decrease, compared to 1970, in the number of independent stations until 2002, thirtytwo (32) years after PTAR adoption.Z The logit form"00*((3" 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  X-have influenced the entry of independent stations.xu SV -ԍ#&a\  P6G;&P# See EI Supplementary Study at 10.x 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.  X -x]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.  Xd-x^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  X-repealed or estimate the number of stations that will exit.u S-ԍ#&a\  P6G;&P# See the LECG Study at 5657, n.29, and 9395. INTV reports the results of an "informal" survey of 40 independent stations indicating that 16 percent of independent station  X-revenue comes from the prime time access period.o\u S-ԍ#&a\  P6G;&P# See INTV Comments at 44.o 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.  X -x_96. What the record does show is a generally healthy financial picture for independent" 10*(([" 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 mid1980s. The average UHF station has been profitable since 1992 after a number of  X-unprofitable years through the 1980s.:u S4-ԍ#&a\  P6G;&P# Entry by 249 commercial UHF stations occurred between 1984 and 1992. This increased the total number of commercial UHF stations from 318 to 567, or by 78 percent. It is not surprising that these new and inexperienced stations would have likely lost money for some years and thereby  S-lowered the overall average profitability for all UHF independents. See Television & Cable Factbook, Vol. 62 (Stations) at I41 (1994). 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 nonFox affiliated  Xv-independents reported average annual profits of $1.5 million per station in 1993.vu S -ԍ#&a\  P6G;&P# NAB, 1993 Television Financial Report 173 (1994). Also, these average profits understate profitability in the largest markets, those to which PTAR  XH-applies.Hlu Se-ԍ#&a\  P6G;&P# See NAB, 1993 Television Financial Report. Pretax profits for independent stations in all ADI Markets in 1992 averaged $2.0 million. For ADI Markets 110, independents averaged $7.4 million.  X -x`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.  X{-xa98. 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  X6-stations.6 u S-ԍ These Commission totals are based on data for 1994 taken from Investing in Television: 1995  S-Market Report. Of the remaining 223 stations, 41 are VHF stations that cannot claim any signal disadvantage specifically warranting PTAR protection. (Indeed, these VHF independents  X-appear to be on average financially stronger than affiliates of the three networks.p`: u S"-ԍ#&a\  P6G;&P# EI Supplementary Study at 23 (independent VHF stations "have a higher cash flow than the average ABC, CBS or NBC affiliate in the top50 markets"). EI bases this finding on data from Table A12 of the EI Study, at 74, which in turn is drawn from NAB's 1994 Television Financial Report.p) Of the  X-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"2b0*((" stations are owned by group owners capable of using their bargaining advantages due to size  X-to obtain programming on improved terms.du Sb-ԍ We define "group owners" as an owner of more than one television station. Group owners  S:-may enjoy programming cost advantages compared to an owner of a single television station. See Stanley Besen and Leland Johnson, "Regulation of Broadcast Station Ownership: Evidence and  S-Theory," in Video Media Competition at 375 (ed. Eli M. Noam, Columbia University Press 1985). 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  X-marketplace adjusts to changes in the supply and demand for programming.u S2 -ԍ #&a\  P6G;&P#See, e.g., "Partner Stations Network calls on Lifeguard," Broadcasting & Cable, July 3, 1995, at 14 (reporting that 44 stations have joined together to produce and air a halfhour "reality  S -strip," Lifeguard, beginning Dec. 25, and to syndicate the show nationally a month later). 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  XH-percent of the 278 independents in the PTAR Top 50 Markets.0:HHu SA-ԍ#&a\  P6G;&P# We also note that the arguments advanced by PTAR proponents cannot apply to the 20 UHF network affiliates in the Top50 PTAR Markets. According to the EI Supplementary Study, at 23, "cash flow and pretax profits of the average ABC, CBS and NBC affiliate UHF station are lower than those of the average independent UHF station." This conclusion rests on 1992 and 1993 profitability  S-data. See EI Supplementary Study, 2728, EI Study at 76, Table A16.0  X - 3. Repeal of PTAR and New Broadcast Networksă  X -xb99. 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 offnetwork 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  X6-in the adjacent prime time period.j6J u S1!-ԍ#&a\  P6G;&P# Viacom Comments at 2425.j Proponents of the rule argue that repeal will severely harm independent stations and, in turn, harm the growth of UPN and WB.  X-xc100. 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"30*((3"  X-networks, especially the Fox network.xu Sy-ԍ#&a\  P6G;&P# See INTV Reply Comments at 1720.x 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.  Xv-xd101. The Commission does not believe that repeal of PTAR will create the grounds for failure of newlylaunched 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  X -firms with many producers actively seeking outlets for their programs.n ju S-ԍ#&a\  P6G;&P# See supra Section IV.B.n 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 highcost programming, and will not create significant problems for independent stations and new networks.  X-xe102. 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  X-INTV under our ex parte rules. u S~-ԍ See, e.g., Letter of David L. Donovan, Vice President, Legal and Legislative Affairs, INTV, July 14, 1995. 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. " 40*(("Ԍ X-C.XxReducing Network Ability to Dictate Affiliate Programming Choices(#  X-xf103. PTAR prohibits the Top 50 Market Affiliates from obtaining networkprovided programs or offnetwork 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 selfinterest. 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  X -rule would permit the affiliate to choose instead from a range of choices (i.e., inhouse or independently produced programs).  X -xg104. The network affiliates, along with the Coalition, argue that only the offnetwork provision of the rule should be repealed. They assert that the offnetwork 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  X-make programming decisions in response to local demand."ou Sj-ԍ#&a\  P6G;&P# See NASA Comments at 10.o The networks dispute that they have this bargaining power. They also point to the efficiencies and consumer benefits that derive from network programming.  X-xh105. 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  XP-programming during the 199394 season.jPju Sk-ԍ#&a\  P6G;&P# Coalition Comments at 32.j The record also shows that affiliates rarely preempt prime time network programming, and that affiliate agreements are often structured  X"-to discourage preemption.Z" u S"-ԍ#&a\  P6G;&P# Id.Z 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  X!-schedule, may not yet provide a competitive alternative to affiliation with one of the other"!50*(( " four networks.  X-xi106. 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  Xv-and efficiencies of network programming.I:vu S-ԍ#&a\  P6G;&P# See Network Inquiry Study, Vol. II at 288 ("[E]conomic factors are the dominant explanation of the decision to carry network programs. Nor is there anything sinister about this. A station's decision to carry a popular program undoubtedly provides substantial benefits to viewers in its community."); FTC Staff Comments at 1920 n.38 (describing mutual incentive of a network and its affiliate to air programming that is attractive to audiences, and therefore valuable to advertisers).I 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  X -one of the three original networks to the Fox network.d u S~-ԍ#&a\  P6G;&P# NBC Comments at 28.d 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  X -more competitive market.` ju S-ԍ#&a\  P6G;&P# EI Study at 15.` The networks also point to the fact that the total amount of network programming during nonprime time dayparts has declined over the years as evidence  X-of the inability of networks to dictate to affiliates.6: u SK-ԍ#&a\  P6G;&P# Since 1977, the total number of nonprime time daypart network programming hours offered to affiliates by the three networks has declined by 25 hours per week. NBC Comments at 2829. NBC also points to the relatively lower clearance rates the networks enjoy during nonprime time dayparts, and notes that live clearance rates are even lower. For example, NBC's more popular  S-afternoon soap operas have live clearance levels of approximately 70 percent. Id.6 Finally, there are today many more options for obtaining programming even without having a network affiliation.  XK-xj107. 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.  X-xk108. 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"6 0*((3"  X-other rules regarding the networkaffiliate relationship.u Sy-ԍ#&a\  P6G;&P# See 47 C.F.R.  73.658(a), (b), (d), (e), (g), (h), (i), 73.3613(a). 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  X-concerns any such capability and incentive would raise."fju S-ԍ#&a\  P6G;&P# Notice of Proposed Rule Making in MM Docket No. 9590, FCC 95226, released June 14,  S-1995, at  2. See also Notice of Proposed Rule Making in MM Docket No. 9592, FCC 95254,  Ss -released June 15, 1995; Notice of Proposed Rule Making in MM Docket No. 9540, FCC 95145, released April 5, 1995. 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 networkaffiliate 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 networkaffiliate bargaining table may look far different to a small, individually owned station in Louisville compared to  X -an established, groupowned station in Chicago. u Sc-ԍ#&a\  P6G;&P# Both Louisville and Chicago are included in the top 50 PTAR markets. 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  X -network feed in nonPTAR markets when they cannot do so in the top 50 markets.` 8u S-ԍ#&a\  P6G;&P# EI Study at 43.`  X-xl109. 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 nonnetwork 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.  X-xm110. 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  X|-not to run network programming during the access hour, but only provided they are each  Xg-assured that no other affiliates or networks airs network programming.g u S%-ԍ#&a\  P6G;&P# As stated in the Network Inquiry Study, under this theory "a network might have to offer a full lineup if other networks did and if audiences for later programs are determined in part by the audiences of the programs which precede them. While each network might prefer a situation whereby"'0*(('" all networks agreed not to offer a full lineup during prime time, each will find it profitable to offer a  Sh-full lineup in the absence of such an agreement." Network Inquiry Study, Vol. II at 254. Such an"g7B0*((" arrangement, while contrary to the antitrust laws if established by individual parties, is made  X-possible by PTAR's network restriction.ZBu S-ԍ#&a\  P6G;&P# Id.Z  X-xn111. 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  X_-also possible."b_u S -ԍ#&a\  P6G;&P# Id. at 255.b 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  X -period programming in the top50 markets is neither local programming nor local news.l u S#-ԍ#&a\  P6G;&P# Coalition Comments, Exh. 8.l  X -xo112. In sum, the record before us establishes sufficient improvement in affiliate  X -bargaining power visavis the networks that any remaining issues concerning the networkaffiliate relationship are best addressed in our network rules.  XM-  VII. SUMMARY OF FINDINGS AND TRANSITION  X-xp113. 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 nonbroadcast 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 nonnetwork programs.  X -xq114. 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"8&0*((<" 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 networkaffiliate relationship are best addressed in the context of our other network rules which are presently under review.  X -xr115. 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, highcost programming. The record also indicates that the rule discourages investment in network programming by lowering the prices of offnetwork programs. Because we find no public interest benefits that outweigh these costs, we conclude that PTAR should be repealed.  XK-xs116. 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  X-mechanism that would sunset the rule after a certain period of time.qu S-ԍ#&a\  P6G;&P# Notice, 9 FCC Rcd at 6363.q 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  X-result" from repeal of PTAR.Zju S-ԍ#&a\  P6G;&P# Id.Z 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 oneyear 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.  X -#Xj\  P6G; XP#xt117. 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 offnetwork 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. "#9 0*((""Ԍ X-xu118. A oneyear 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 offnetwork 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 postrepeal programming changes that are announced by network affiliates.  XH-xv119. We recognize that existing contractual arrangements may already provide some  X1-transition period for independent stations who have obtained licensing rights to air offnetwork programs during the access period for the 199596 season and even for subsequent  X -years. u S| -ԍ#&a\  P6G;&P# #&a\  P6G;&P# Contracts for offnetwork programming generally have 57 year terms. See LECG Study at 76; Coalition Reply Comments at 12. The contracts for popular offnetwork shows are often  S.-negotiated several years in advance of the airing of the program. See Network Inquiry Study Vol. II,  S-at 429. For example, the licensing rights for Seinfeld and Home Improvement reruns, which will begin  S-their offnetwork runs this fall, were negotiated well over a year ago for most stations. See Steve  S-McClellan, "The Selling of 'Seinfeld,'" Broadcasting & Cable at 14, March 7, 1994; Thomas Tyrer,  S-"'Simpsons,' 'Home' Pick Up Top Clearances," Electronic Media at 40, Oct. 4, 1993. 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 firstrun syndicated programs during the access hour have most likely already made contractual commitments to  X -run this programming for the upcoming season. u S-ԍ#&a\  P6G;&P# #&a\  P6G;&P#Contracts for firstrun syndicated programming generally run for one year, and in some cases two years. Coalition Reply Comments at 12. 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 networkprovided programming during the access hour in the event they choose to do  XK-so.bK u S-ԍ#&a\  P6G;&P# #&a\  P6G;&P#See National Ass'n of Indep. Television Producers and Distrib., 502 F.2d at 254 (stating that network program planning begins twelve to eighteen months in advance). CBS has stated that it has no present plans to run a network feed during the access hour in the event PTAR is repealed. CBS Comments at 16. 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.  X-xw120. Some changes, however, could and would be expected to occur. Network affiliates often contract for offnetwork programs to air in other dayparts, such as early fringe  X-and late fringe.&u S'-ԍ#&a\  P6G;&P# See Network Inquiry Study Vol. II, at 429. Absent the transition period, these contracts could be renegotiated and":0*((4" modified to allow Top 50 PTAR Market Affiliates to air such programming during the access period. By establishing a oneyear 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 nearterm 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  X -free to contract during the transition period for the right to air accessperiod network or off X -network programming after the effective date of PTAR repeal.  X -xx121. We reject transition proposals that would continue PTAR for an indefinite or  X -overly long period of time.b u S;-ԍ#&a\  P6G;&P# These proposals include repealing PTAR in 10 years, or tying repeal to (1) the new networks obtaining a certain nationwide coverage and programming levels comparable to the three original networks, (2) the elimination of the "UHF handicap", or (3) the general availability of digital  S-television. See Viacom Reply Comments at 2526; INTV Reply Comments at 3738. 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.  XO-xy122. Nor do we believe the scheduled repeal of the remaining fin/syn rules calls for a  X8-longer transition period for PTAR.$8u S-ԍ#&a\  P6G;&P# The remaining fin/syn rules are scheduled to be eliminated on November 10, 1995. The  S-Commission has sought comment on a proposal to accelerate this expiration date. See supra note 15.$ 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  X-review of the rule prior to its scheduled expiration, as we did in the fin/syn proceeding.lu S!-ԍ#&a\  P6G;&P# See Fin/Syn Second R&O, 8 FCC Rcd at 3340. 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  XR-established its fin/syn transition in 1993.R u S&-ԍ#&a\  P6G;&P# Indeed, the 1994 Court of Appeals decision affirming the Commission's 1993 fin/syn decision stated that the "three original networks are even weaker today than they were in March of [1993]"&0*(('" when the decision to deregulate was made, and no doubt they will be weaker still [in 1994] when the  Sh-[fin/syn review] proceeding is to commence." See Capital Cities/ABC, Inc., 29 F.3d at 316. Phased deregulation is less useful when the"R;B0*((" 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.  Xv-xz123. We believe that a oneyear transition period strikes the appropriate balance between our conclusion to repeal PTAR and the need to avoid undue disruption from eliminating a 25year old rule. The courts have noted the considerable discretion that the  X1-Commission has in establishing timetables to minimize disruption from regulatory changes.:1Bu S$ -ԍ#&a\  P6G;&P# In upholding our fin/syn transition mechanism, the U.S. Court of Appeals stated that the "precise timetable on which the Commission executes a major turn in regulatory policy is a matter of judgment and prudence rather than of logic and measurement, and it is confided to the discretion of  S-the Commission within broad limits." Capital Cities/ABC, Inc. v. FCC, 29 F.3d 309, 316 (7th Cir. 1994). Indeed, there is judicial precedent in the context of PTAR for the proposition that a transition  X -period is permissible when necessary to allow parties time to adjust to deregulation.g  Du S-ԍ #&a\  P6G;&P# In particular, in National Ass'n of Indep. Television Producers & Distrib. v. FCC, 502 F.2d 249 (2d Cir. 1974), the U.S. Court of Appeals for the Second Circuit vacated a 1974 FCC decision on the grounds that it did not provide independent programmers and the three networks sufficient lead time to prepare for the FCC's decision to partially repeal PTAR by, among other things, reducing the access period to onehalf hour. (These concerns were subsequently mooted given that the  S2-Commission, upon remand, generally reinstated the version of PTAR it had adopted in 1970. See  S -supra note 17.) We note that while the court's decision provides general support for a transition, its specific findings are not controlling under today's circumstances and do not warrant a transition longer than the oneyear period we adopt today. First, the networks have not argued in this proceeding that they need any lead time before repeal of the rule becomes effective. As for independent programmers, their existing contractual arrangements already provide them a builtin transition period of at least a year given that, as noted, many network affiliates would appear to have already committed to carry  S-their programming at least through the 199596 televisions season. See supra note 228. In any event, the record shows that independent programmers, even without PTAR, will continue to have access to  S-numerous outlets for their programs. See supra Section VI.A.g  X -x{124. We will thus schedule repeal of the rule in its entirety for August 30, 1996.  X -This will provide ample time for publication of this Report and Order in the Federal Register before the oneyear transition period commences. It also allows this period to end prior to the start of the 199697 television season.  Xd-x|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"O<0*(("  X-parties that the rule is contrary to the First Amendment.du Sy-ԍ#&a\  P6G;&P# We note, however, that the constitutionality of PTAR was upheld in Mt. Mansfield, Inc. v.  SS-FCC, 442 F.2d 470 (2d Cir. 1971). See also Schurz Communications, Inc. v. FCC, 982 F.2d 103, 104849 (7th Cir. 1992) (stating, in review of FCC fin/syn decision, that Supreme Court has interpreted First Amendment as not prohibiting FCC from regulating activities of broadcast networks). We also do not believe it is appropriate to alter the definition of "network" to include the new networks as urged by some  X-parties.S<u Sw-ԍ#&a\  P6G;&P# See, e.g., Comments of NBC at 4244. For purposes of PTAR, a "network" generally is any entity (or an entity under common control) regularly providing more than 15 hours of prime time  S) -programming per week (excluding live coverage of bona fide news events of national importance) to interconnected affiliates that reach, in aggregate, at least 75 percent of television households  S -nationwide. 47 C.F.R.  73.662 (f). #Xx P7 =XP#S We are not persuaded that this definition is inequitable or that it causes new  X-networks to curtail their prime time offerings in order to evade the application of PTAR.) u Sd-ԍ#&a\  P6G;&P# See, e.g., Fox Comments at 2, 4 (stating that Fox offers only two hours of daily prime time programming so that its affiliates can counterprogram with locally produced news during the last hour of prime time).) 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  Xv-forth in the rule.]vJ u Sq-ԍ#&a\  P6G;&P# Programming distributed by an entity prior to becoming a network, and subsequently produced episodes of a series first exhibited by that entity prior to becoming a network, are not network programming for purposes of PTAR. Moreover, for 36 months after an entity becomes a network, stations owned by or affiliated with that network are exempt from compliance with the requirements of PTAR with respect to programming already under contract at the time the entity became a network. 47 C.F.R..  73.658(k), Notes 3 and 4.] Finally, given our decision to repeal the rule, we will not modify the  X_-current exemptions to PTAR as proposed by a number of commenters.b_"u S2-ԍ#&a\  P6G;&P# See 47 C.F.R.  73.658(k)(16) (listing exemptions). See Comments of NBC at 4446 (arguing that Commission should extend certain exemptions to Saturday night access period); Comments of the Office of the Commissioner of Baseball (arguing that the FCC should remove the prohibition on network telecasts of live sports events during the prime time access period). The proposed revisions to the definition of a "network" and the rule's exemptions are not appropriate for the oneyear 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 oneyear transition period. "y=L0*(("Ԍ VIII. ADMINISTRATIVE MATTERS  X-A.xRegulatory Flexibility Analysis  X-x}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.  X -x~127. Summary of Issues Raised by the Public Comments in Response to the Initial  X -Regulatory Flexibility Analysis: None.  X-x128. 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 networkaffiliated stations in the Top 50 television markets and discourages investment in network programming, without offsetting public interest benefits.  X-x129. 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  XA-U.S.C.  601, et seq.  X-B.xAdditional Information  X -x130. For additional information regarding this proceeding, contact Charles W. Logan or Alan E. Aronowitz, Mass Media Bureau, Policy and Rules Division, Legal Branch, (202) 7761653, or Alan Baughcum, Mass Media Bureau, Policy and Rules Division, Policy Analysis Branch, (202) 7390770. "/'>0*((%"ԌB IX. ORDERING CLAUSES x131. 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. x132. IT IS FURTHER ORDERED that MM Docket No. 94123 IS TERMINATED. x44` `  FEDERAL COMMUNICATIONS COMMISSION x44` `  William F. Caton x44` `  Acting Secretary"?0*(("  X-#&a\  P6G;&P#X01Í ÍX01Í Í  #Xj\  P6G; XP#      3Appendix A Ã  X-  X-xThe following parties filed formal comments in response to the FCC's #Xu&_ x$&7 ^XX## Xx P7 =XP#Notice of  W-Proposed Rule Making:  Y-1.XxThe Association of Independent Television Stations, Inc.   Y`-2.XxBureau of Economics, Federal Trade Commission   Y2-3.XxCapital Cities/ABC, Inc.   Y -4.XxCBS Inc.   Y -5.XxChief Counsel for Advocacy, United States Small Business Administration   Y -6.XxThe Coalition to Enhance Diversity   Yz-7.XxThe Commissioner of Baseball   YL-8.XxEconomists Incorporated (Economic Analysis prepared for ABC, CBS and NBC)   Y-9.XxFreedom of Expression Foundation, Inc.   Y-10.XxThe Freedom Forum First Amendment Center at Vanderbilt University   Y-11.XxFirst Media Television, L.P.   Y}-12.XxFriends of Prime Time Access   YO-13.XxKing World Productions, Inc.   Y!-14.XxThe Law and Economics Consulting Group Inc. (Economic Report prepared for INTV, King World & Viacom)   Y-15.XxMedia Access Project/People for the American Way   Y!-16.XxThe Media Institute   Y#-17.XxThe Motion Picture Association of America, Inc.   YR%-18.XxNational Broadcasting Company, Inc. (NBC)   Y$'-19.XxNetwork Affiliated Stations Alliance "$'@0*((2("Ԍ Y-ԙ20.XxUPN Affiliates Association   Y-21.XxViacom Inc.   Y-22.XxWestinghouse Broadcasting Company (Group W)   Yv-23.XxOliver E. Williamson & Glenn A. Woroch (A Comparative Efficiency Analysis prepared for the Coalition to Enhance Diversity)   Y -xThe following parties filed formal reply comments in response to the FCC's Notice of  Y -Proposed Rule Making:  X -  Y -   1.XxThe Association of Independent Television Stations, Inc.   Y-2.XxCapital Cities/ABC, Inc.   Yf-3.XxCBS Inc.   Y8-4.XxThe Coalition to Enhance Diversity   Y -5.XxEconomists Incorporated (Economic Analysis prepared for ABC, CBS and NBC)   Y-6.XxFriends of Prime Time Access   Y-7.XxKing World Productions, Inc.   Yi-8.XxThe Law and Economics Consulting Group Inc. (Economic Report prepared for INTV, King World & Viacom)   Y$-9.XxMedia Access Project/People for the American Way   Y-10.XxNational Broadcasting Company, Inc. (NBC)   Y -11.XxNetwork Affiliated Stations Alliance   Y"-12.XxViacom Inc.   Yl$-13.XxOliver E. Williamson & Glenn A. Woroch (A Comparative Efficiency Analysis prepared for the Coalition to Enhance Diversity)  ">&A0*((`'" xAppendix B: Additional Discussion of the EI Study's of the UHF Handicap x1. 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 offair 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. x2. 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: XxThe continuing handicap of UHF network affiliates may reflect their status as smallmarket 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 commonsense hypothesis that the UHF handicap has been greatly reduced for all classes of station.  x3. 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 noncable household allday 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. "!B0*(("" x44Appendix C: Technical Problems with the LECG Study x1. 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. x2. 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:  Y -xa.44There is a serious econometric problem with the variable T71. In general, the use of time in this fashion as an explanatory variable is  Yy-problematic.y@ S -ԍ See Charles R. Nelson and Heejoon Kang, "Pitfalls in the Use of Time as an Explanatory Variable in Regression," Journal of Business and Economic Statistics, Volume 2, Issue 1, 1984, pages 7382. First, it may mask something else happening in the  Yb-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  Y-approaches infinity, the mean value of time may be nonexistent.1@ S-ԍ#&a\  P6G;&P# A flat trend line will have a mean value but not a finite standard deviation as time approaches infinity. However, an upward sloping trend line will not have a mean value or a finite standard deviation. In such a case, the time trend variable is nonstationary. However, the regression theory used by LECG requires that each variable be  Y-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.Ƥ4  Yi-xb.44Another set of problems arises with Table D.3 (page 47 of Appendix D). That table presents the results of a logit regression, by definition nonlinear, 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.Ƥ4 " C0*((!"Ԍ Y-xc.44A continuing problem with LECG's regression analysis is illustrated by Tables D3 and D4 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.Ƥ4  Yv-xd.44Similarly, the R2s reported in LECG's Table D4 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 D5 predicts the ratings of an average independent station with and without PTAR. It is from these ratings  Y -that the LECG Study conclude s 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 D7, that report predicted effects of PTAR's repeal.Ƥ4 "yD0*((" @ Appendix D: Video Programming Distribution  Concentration in the Top 50 PTAR Markets  Y-Data Notes x1. First, Commission staff relied on the list of the Top50 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.) x2. 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.  Y -x3. Third, the source for market shares was Investing in Television: 1995 Market  Y -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.  Y-"E0*((" "F0*(("  X-  # Xj\  P6G; XP#Appendix E: Analysis of LECG's Surrebuttal and Ex Parte Materials  X-x1. INTV and their consultant, LECG, filed extensive surrebuttal and ex parte materials  X-toward the end of this proceeding.2u S8-ԍ#&a\  P6G;&P# See LECG's "Surrebuttal and Further Econometric Evidence" and "Appendices to surrebuttal and Further Econometric Evidence," (both filed July 11, 1995), and INTV's "Written Exparte Communications" (filed July 14, 1995).2 We have carefully reviewed and analyzed these materials. Our conclusions on the essential issues raised by INTV and LECG are:  Xz-Xx,44LECG'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.Ƥ4  X -Xx,44INTV does not demonstrate that repeal of PTAR will lead to significant reductions in the revenues and profits of independents.Ƥ4  X -Xx,44LECG concludes erroneously that rising nominal network primetime advertising prices demonstrate network market power.Ƥ4  X-Xx,44LECG does not demonstrate that, after PTAR's repeal, viewer welfare will be reduced as the result of network affiliates' and independent stations' program purchases.Ƥ4 x2. We here explain the basis for each of these conclusions in turn.  X -The LECG Model x3. 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  X-the problems with their model as listed in Section VI.B.2 of this order.":u S{-ԍ#&a\  P6G;&P# The three major television networks (ABC, CBS, and NBC) filed "Comment on LECG  SS-Surrebuttal" by EI at 14 that reached a similar conclusion. See also "Review of the Prime Time Access Rule; MM Docket No. 94123," a letter with attachments filed by Counsel for the Coalition in which Counsel's asserts that LECG's ". . . report does not provide any effective refutation of Professors Williamson and Woroch's critique of LECG's earlier work."" x4. 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"TG 0*(("  X-deriving these prediction intervals is incorrect.0u Sy-ԍ#&a\  P6G;&P# In their Appendices to their Surrebuttal, LECG report calculated prediction intervals (confidence intervals for their predictions) for their forecasts (from the LECG Study) that PTAR would cause significant reductions in ratings for independent stations. These intervals are based on  SKt(p,x0V(b)x0) where p is a point estimate for the dependent variable and V(b) is the covariance matrix of the GLS estimator. Such a prediction interval is incorrect. xDerivation of the appropriate prediction interval parallels the traditional OLS prediction interval as given in econometrics texts, e.g. Henri Theil, Principles of Econometrics, John Wiley &  Sa-Sons, Inc., New York, 1971 at 123. Let y = XB+ where E[] = 2 which has  S9 Kdecomposition PP = 2é1. Multiplying both sides by P produces Py = PXB + P, i.e. y*=X*B+*.  S KTherefore, OLS on the transformed equation is efficient and b=(X*X*)é1X*y* = (X2é1X)é1X2é1y. It  S -follows that E[b]=B and V(b)=%2(X2é1X)é1.  S KxLet y0 be the value of the dependent variable in the future period. Thus, y0=Bx0+0 where x0  S Kis a vector of regressors in the future period and 0 is the error in the future period. The predictor of  Sq Ky in the future period is iy^0=bx0 which is equal to E[y0]. To derive a prediction interval for y0, we  SIKconsider the forecast error e0=y0ĩiy^0 = (Bb)x0+0. Thus the forecast error variance V(e0) =  S!KV[(bB)x0]+%2 = x0V(b)x0+%2. This is the GLS analogue to the traditional OLS prediction intervals,  SKand differs from the x0V(b)x0 used by LECG. Since %2 is always positive, the correct prediction intervals are larger than those reported by LECG. 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.  X-Revenues and Profits of Independent Television Stations x5. INTV asserts that they have used three "separate" methods of calculating the  XH-revenue loss to independents due to PTAR's repeal.Hu S-ԍ#&a\  P6G;&P# See "Written Exparte Communications" at 6. 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  X -that model's predictions. bu S-ԍ#&a\  P6G;&P# The first two methods rely upon LECG's predicted 58% ratings decline in the access period for all markets. The third method uses LECG's predicted ratings declines for each market individually. x6. 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. x7. Third, the same informal INTV survey was used to estimate that independents'"KH0*(( " 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.  X-Nominal Network Advertising Prices and Market Power x8. 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." x9. The Commission concludes that LECG has made two errors in their economic  X -analysis: first, they focus on nominal rather than real prices, and second, they argue that the longrun supply curve in competitive markets must be flat.. Depending on whether the long X-run market supply curve is upwardsloping, flat, or downwardsloping, real prices would go up, stay constant, or drop, respectively, as demand in competitive markets increases. x10. At page 66 of their Surrebuttal, LECG states: "An increase in demand that does  X8-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  X -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  X-costs.Tu S>-ԍ#&a\  P6G;&P# For a discussion of a downwardsloping supply curve for perfectly competitive markets, see  S-James D. Gwartney and Richard L. Stroup, Economics: Private and Public Choice, 1987, Harcourt Brace Jovanovich, Orlando, Florida, at 440441.T An increasingcost 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, wheatgrowing 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 longrun, their costs rise because the price of  XR-mechanical harvesters inter alia rises. This does not require the exercise of market power by wheat growers or by manufacturers of mechanical harvesters.  X-Program Purchases and Viewer Welfarewu S#-ԍ#&a\  P6G;&P# See LECG's Surrebuttal at 8595.w  X-x11. The model presented by LECG assumes that there are two possible program  X -choices: an offnetwork program which has a cost of c that is sunk, and a firstrun program  X!iwhich has a cost of c that is not sunk. The offnetwork program generates revenue rs and the"!I0*(( "  Xifirstrun program generates a revenue of rh > rs. The total surplus to be divided between the  Xistation and the producer of the offnetwork program is rs 0; 0 because the cost is sunk. The  Xisurplus to be divided between the station and the producer of the first run program is rh c. Xx  x12. 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 offnetwork  Xeiprogram if rs > rh c and to pick the firstrun program otherwise. Clearly, because c is a positive number, the firstrun program may not be chosen, even though it generates more consumer welfare. x13. 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  X -higher with the firstrun 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. Xx  x14. 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 willingnesstopay 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  X-failed to document that social welfare is reduced by repeal of PTAR."J0*(('"  'g    K @@#XP\  P6Q XP#xAppendix 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 x1. The Authority Citation for Part 73 continues to read as follows: AUTHORITY: 47 U.S.C.  154, 303, 334. x2. Section 73.658 is amended by removing and reserving paragraph (k).  'g