FCC Ruling Shows Agency's Ability to Prevent a Sports Network Blackout

As consolidation has suddenly become hot in the media world, regulatory authorities are being asked to judge mergers (AT&T/DirecTV, Comcast/Time Warner Cable) with potentially more (Fox/Time Warner) to come. If recent history is any indication, we shouldn't expect thumbs down on the M&A, but rather conditions imposed as the terms of acceptance.

Those conditions often get overlooked, but can mean something if regulatory agencies are willing to flex their authority. On Wednesday, the FCC made a ruling that might demonstrate a willingness to do just that.

The agency was asked to review a dispute between a Pittsburgh-based regional sports network ("RSN") owned by DirecTV and independent cable distributor Armstrong Utilities. According to Proskauer, the law firm representing Armstrong, it's the first ruling of its nature.

What makes this dispute unique is that Armstrong Utilities took advantage of RSN arbitration requirements the FCC had imposed in mega-media transactions like News Corp.'s purchase of DirecTV, Liberty Media's purchase of DirecTV and Comcast's purchase of NBCUniversal.

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Under the imposed program, if parties can't agree on the terms of a license deal, they can go to "baseball-style" arbitration where each side presents their best, final offer with an arbitrator choosing which offer "most closely approximates the fair market value of the programming carriage rights at issue." It's intended to counter the vertically-integrated might of big media companies and limit the threat of blackouts when carriage fights break out.

In 2011, an arbitrator found that Armstrong's final offer was closer to "fair market" than DirectTV Sports Net Pittsburgh's own offer. The ruling was then affirmed by the FCC Media Bureau, which led to an appeal before five commissioners at the FCC.

DirecTV challenged the Media Bureau's authority to act, but in a footnote to its ruling, a majority of FCC commissioners noted its mandate to "[a]dminister and enforce rules and policies regarding... program access" and further pointed to the conditions imposed at the time of Liberty Media's acquisition of DirecTV.

As for the ruling itself, the majority opinion points to Armstrong's evidence of subscriber and revenue numbers and affirms the prior decisions in favor of Armstrong. Here's the full opinion.

The decision triggers a dissent from Commissioner Ajit Pai, who starts out by contrasting "baseball-style" arbitration with an episode of The Price is Right where the object of the game is to be close to the price without going over. It appears he's not objecting to the authority to make the decision. Given the fact that the arbitrator had to pick which side was closest to fair market, he believes his fellow commissioners didn't live up to the task. He thinks they should have looked at more evidence than just subscribers and revenue to estimate a fair value themselves before deciding which was closest. He writes what troubles him "is the flawed methodology used to resolve this case, particularly because it will set a precedent for resolving future disputes between RSNs and MVPDs."

E-mail: Eriq.Gardner@THR.com
Twitter: @eriqgardner