Analyst unpacks themes from FCC’s Nexstar-Mission Broadcasting decision

The FCC last week fined broadcaster Nexstar Media Group $1.2 million, while ordering Mission Broadcasting to sell WPIX in New York, finding that Nexstar ultimately controlled the TV station and in doing so violated rules and exceeded national broadcast TV ownership limits.

In a Tuesday note to investors, New Street Research analyst Blair Levin unpacked implications, saying that the real battle lies ahead, but the FCC decision highlights three themes pertaining to media that the firm advised should be kept in mind for the coming years. Those include strict enforcement by the current FCC of media ownership laws; an FCC desire to reduce fees in the MVPD ecosystem; and broad declines in the MVPD sphere that the analyst expects will lead to more aggressive stakeholder action and regulatory and congressional rule changes down the line.  

FCC’s Nexstar action

The FCC last week in a Notice of Apparent Liability for Forfeiture (NAL) found that Mission Broadcasting and Nexstar violated rules “by undertaking a de facto transfer of control of WPIX from Mission to Nexstar without prior authorization” and in doing so, Nexstar apparently exceeded national TV ownership caps.

Under the Communications Act the FCC cannot allow a company to own or control broadcast stations that in total reach more than 39% of the U.S. TV audience.

In additions to fines (including $612,000 to be paid by Mission), the two options the FCC laid out to remedy the situation are either Mission selling WPIX to an unrelated third-party, or selling it to Nexstar, which would need FCC consent for the transfer and to also divest other stations to remain within the national TV ownership limits.

In terms of how the current situation arose, to avoid breaching TV ownership cap rules and gain regulatory approval of Nexstar’s $6.4 billion 2019 acquisition of Tribune Media, the broadcaster was required to divest certain stations, including WPIX, which it sold to Scripps. The WPIX New York station was later purchased by Mission Broadcasting, through transfer of an option and with financing help from Nexstar. The deal also involved an agreement that included Nexstar providing all programming for WPIX and collecting revenue from the station. The FCC approved the Scripps-Mission transaction in 2020.

The FCC’s findings on Nexstar last week detailed how the broadcast group and Mission Broadcasting are financially and operationally interwoven through various agreements in several markets. The FCC noted agreements like Shared Services Agreements (SSA), Joint Sales Agreements (JSA), and Local Programming and Marketing Agreements (LPMA) are recognized as beneficial by the agency in markets where both parties own a station. But the FCC hasn’t previously considered whether benefits extend to a market where a station licensee has such agreements with an entity that doesn’t already operate its own station in the same market – the latter which is the case for WPIX in New York, where there is not a separate Nexstar-owned station.

The FCC greenlit the Nexstar-Tribune deal in 2019 based on the divestiture of WPIX but in its Notice noted Nexstar made moves regarding WPIX prior and following the approval.

“Both before and after that date, however, Nexstar took steps that contemplated the possibility that a Nexstar-affiliated entity, such as Mission, would acquire WPIX in place of Nexstar, as Nexstar was unable to lawfully acquire the station and remain in compliance with the National Ownership Cap,” the NAL stated. Notably, Nexstar also negotiated for and signed retransmission consent agreements with MVPDs related to Mission Broadcasting-WPIX.

Disputes between distributors and broadcasters over rising retransmission consent fees, amid linear subscriber declines, has led to an increasing number of channel blackouts for consumers – garnering attention from both lawmakers and regulators.

Before the FCC’s determination, multiple pay TV providers, including DirecTV, Comcast, and Charter petitioned or filed complaints with the FCC, contending Nexstar was exerting operational and ultimate control of WPIX, including in retrans negotiations, which helped predicate the investigation by the regulator.

In finding Nexstar controlled WPIX, the FCC said the record shows Nexstar assumed control from Mission across three areas in question, namely, policies governing station programming, personnel, and finances.

While the FCC acknowledged it was previously aware of certain aspects of the Nexstar-Mission relationship, including the proposed LPMA (Local Programming and Marketing Agreement) and Nexstar’s option to purchase WPIX, it said additional, previously undisclosed information surfaced during the investigation. Of that, “the most notable being Mission’s complete delegation of its retransmission consent authority for WPIX—which we confirmed only during the course of our investigation. This factor, in combination with the application of the LPMA and the operation of the relationship in practice, leads us to conclude that Nexstar has overstepped the bounds and assumed de facto control of WPIX.”

Following the decision, Nexstar pushed back, with CEO Perry Sook saying the broadcaster was “extremely disappointed” by the FCC action and “we intend to dispute it vigorously.”

“We believe the FCC has been misled by the often distracting noise in the media ecosphere and that it has completely misjudged the facts.  The facts are that Nexstar has always complied with FCC regulations and that its relationship with WPIX-TV under a Local Marketing Agreement (LMA) was approved by the FCC in 2020, when WPIX-TV was purchased by Mission Broadcasting, Inc.,” Sook stated. “Nexstar believes that joint operating, shared service, and local marketing agreements like those in which it is engaged are vitally important to maintain a competitive media marketplace and to enable broadcasters to continue investing in local news, investigative journalism, and other services that they uniquely provide to the communities in which they are located.”

Not material short-term, implications for the years ahead

Overall, New Street Research doesn’t see the WPIX action as rippling out to significantly affect others in the industry, but suggested themes arising around the situation with the FCC will eventually come to bear.

“In the short term, we don’t view what the FCC did regarding WPIX as material to the broader sector, but it is an indication of trends that are leading to a much bigger battle,” wrote Levin in a March 26 note.

In terms of the FCC and Chairwoman Jessica Rosenworcel standing firm on TV ownership cap rules, “particularly when it comes to maneuvers that could raise retransmission consent fees,” NSR pointed to other examples, including last year’s failed attempt by Standard General to acquire Tegna.

“In the attempted Tegna acquisition, [Rosenworcel] did not give the acquiring party an opportunity to cure alleged missteps in structuring the deal in ways that the Media Bureau viewed as rule violations,” wrote Levin.

The analyst cited a Quadrennial review order adopted by the FCC last December that retained existing rules and closed a loophole regarding the transfer of station affiliation to certain parties, which the chairwoman thought could be used to skirt and exceed ownership limits. And in the Nexstar-Mission situation, NSR wrote that the FCC “looked at the totality of evidence, including forcing the companies to provide previously undisclosed evidence” to determine a violation of ownership caps.

On the MVPD fees front, as outlined by NSR, the FCC has taken several steps over the past year to address fees it sees as harmful or confusing to consumers. Such as the agency requiring “all-in” pricing on cable and satellite bills and work to eliminate “junk fees” including as early cable termination fees, among other efforts.

“Arguably, prohibiting arrangements that violate media ownership limits can be justified in part on how such arrangements could lead to increased retransmission consent fees (such as in both the Tegna and Nexstar/Mission/WPIX situations.),” wrote Levin.

The FCC has also proposed requiring cable and satellite operators to provide rebates for consumers impacted by channel blackouts amid contract disputes, including retransmission consent.

Finally, the firm cited broad MVPD declines as putting financial pressure on all stakeholders in coming years and causing them eventually “to take more aggressive action and the FCC and Congress to adjust the rules of the road.”  That includes for broadcasters (where NSR sees local broadcaster’s main revenue sources of advertising and retrans fees as vulnerable) and similar competitive pressure felt by other linear television (where NSR noted carriage fees and advertising revenues are being squeezed alongside subscriber declines and competition from streaming and short-form video platforms).

NSR also called out DirecTV’s recent move to discount around $12 from monthly pay TV bills for consumers who opt-out of their local broadcast stations while it also tests national network feeds to offset the loss of local broadcasters.

Levin acknowledged that the specifics of what exactly precipitates bigger changes is still unknown, but the analyst posited some drivers, including the forthcoming 8th Circuit review of FCC media ownership rules; a deal that forces the FCC to take action amid changes in the landscape; election results that shift the majority from the currently Democratic-led FCC; or companies evolving business models on their own and accelerating current trends.

“But a change is coming in the next few years, as the decline of linear television accelerates in its economic and culture impact,” concluded Levin.