Nexstar-Tribune Merger: Potential Competition Issues

Nexstar-Tribune Merger: Potential Competition Issues

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Updated February 22, 2019
Nexstar-Tribune Merger: Potential Competition Issues
On December 3, 2018, Nexstar Media Group and Tribune
the industry’s revenue. For the first nine months of 2018,
Media Company announced a merger agreement that would
fees from MVPDs represented 42% of Nexstar’s $1.97
create the largest broadcast television station owner in the
billion in revenue, and 36% of Tribune’s $1.43 billion in
United States. Nexstar values Tribune at approximately
revenue.
$6.4 billion. The proposed merger is subject to approval by
both the Federal Communications Commission (FCC) and
Figure 1. TV Industry Revenue Sources over Time
the Antitrust Division of the U.S. Department of Justice
(DOJ). Because both companies already are large owners of
broadcast stations, the proposed transaction raises policy
issues with respect to whether the merged entity would
violate limits on broadcast station ownership at the local or
national levels and whether it would have excessive power
over local advertising markets.
The Two Companies
Nexstar
Nexstar Media Group owns, operates, programs, and/or
provides sales and other services to 174 full-power

television stations in 100 markets, reaching nearly 39% of
Source: S&P Global Market Intelligence.
all U.S. television households. Nexstar owns 138 stations,
Notes: Broadcasters’ revenue tends to rise in even-numbered years
including 10 satellite stations that are used to extend the
due to political advertising spending. Figures not adjusted for inflation.
reach of other Nexstar stations. In addition, it operates,
programs, and/or provides sales and other services to 36
The increasing importance of retransmission consent
stations owned by other companies.
revenue to broadcasters reflects increased competition from
online advertising. As companies such as Facebook and
Tribune
Google have captured a greater share of total advertising
Tribune owns, operates, programs, and/or provides sales
revenue, broadcasters have sought to diversify their sources
and other services to 44 full-power television stations
of revenue by seeking higher retransmission consent fees.
reaching 19 markets, or more than 36% of all U.S.
television households. Tribune owns 41 stations, of which
Cable and satellite operators that fail to reach
two are satellite stations, and operates, programs, and/or
retransmission agreements with broadcast stations run the
provides sales and other services to the remaining three
risk of driving subscribers to competitors in order to watch
stations. In addition, Tribune owns the cable network WGN
broadcast programming. However, some MVPDs are losing
America; five radio stations (one in Chicago and four in
subscribers and are concerned that raising prices to pay for
Seattle); and Tribune Studios, which produces original
higher retransmission consent fees will accelerate that
programming for Tribune’s stations and cable network.
trend. These negotiations often occur at the corporate level,
between a company that owns multiple broadcast stations
Consumer and Industry Trends
and an MVPD that operates many cable systems or a
Broadcast television stations such as those owned by
nationwide satellite service, rather than at the local level.
Nexstar and Tribune have two primary sources of revenue.
Companies’ quest for greater bargaining power in
They sell advertising, charging rates based on the number
negotiations has driven consolidation in both the broadcast
and demographic characteristics of viewers who watch their
television and MVPD industries.
programs and visit their websites. They also may charge
cable and satellite operators, known as multichannel video
Regulatory Review
program distributors (MVPDs), for the right to retransmit
Before the companies may complete the merger, two
their stations’ signals to the operators’ subscribers.
government entities must review it: the FCC and the DOJ.
The FCC evaluates whether the transaction would be in the
As Figure 1 indicates, retransmission consent revenues
public interest, pursuant to Section 310(d) of the 1934
have become increasingly important to television
Communications Act, as amended. The FCC may approve
broadcasters. In 2018, retransmission consent fees
the merger with or without conditions, or designate the
generated nearly $10 billion for the broadcast industry,
merger for a hearing by an FCC administrative law judge.
accounting for 31% of industry revenues. A decade earlier,
retransmission fees generated $1 billion, representing 1% of
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Nexstar-Tribune Merger: Potential Competition Issues
The DOJ reviews the transaction to determine whether it
Antitrust Analysis. With respect to the advertising product
would substantially reduce competition, as prohibited by
market, the DOJ has traditionally treated broadcast
Section 7 of the Clayton Antitrust Act of 1914. The agency
television as a stand-alone category. In January 2019,
may allow the deal to go forward unchallenged, enter into a
Makan Delrahim, the assistant attorney general for antitrust,
negotiated consent agreement with the companies, or seek
said the agency is considering whether to broaden its
to stop the transaction by filing for a preliminary injunction
definition of the product market by considering online
in federal court.
advertising as well.
Potential Issues for Regulatory Review
Antitrust authorities often use the Herfindahl-Hirschman
Index (HHI) to measure how a merger could affect market
Local Issues
structure. The HHI is calculated by squaring the market
The Nielsen Company, a market research firm, assigns each
share of each firm competing in the product market and
U.S. county and each broadcast television station to a
then summing the resulting numbers. For television
unique geographic television market in order to measure
broadcasters, market shares can be measured by revenue or
viewing habits. Advertisers, MVPDs, and government
number of viewers. According to current merger guidelines,
regulators use Nielsen’s construct, known as Designated
markets with HHIs above 2500 are highly concentrated.
Market Areas (DMAs), to define local television markets.
Based on CRS analysis of 2018 broadcast television
FCC Media Ownership Rules. The FCC uses DMAs to
revenue market share estimates by the firm S&P Global
determine the number of local television stations a single
Intelligence, the Indianapolis DMA has an HHI of 3155. In
entity can own within a geographic region. The FCC does
some instances, this might raise antitrust concerns.
not consider relationships between stations that share
However, because the Nexstar-Tribune merger would not
services, such as sales staff, to be “control” for the purpose
immediately change the HHI in this market if Nexstar
of applying its TV local ownership rules.
divests the two stations it currently owns, the potential
competitive effects on the Indianapolis advertising market
Current FCC rules allow an entity to own up to two
may raise less concern. In addition, the DOJ may view the
television stations within a DMA. Prior to January 2019,
issue differently if it includes online advertising in the
with limited exceptions, only one of those stations could be
relevant product market.
among the “Top Four,” ranked by the station’s share of the
television viewing audience in that DMA. The recently
National Issues
amended rules permit the agency to evaluate, on a case-by-
FCC National Ownership Rules. The Consolidated
case basis, whether common ownership of two Top Four
Appropriations Act, 2004 (P.L. 108-199) directed the FCC
stations is in the public interest. Generally, Top Four
to adopt rules that would cap the reach of a single
stations are the local affiliates of the four major English-
company’s television stations at 39% of U.S. television
language broadcast television networks—ABC, CBS, Fox,
households. At the time Congress enacted this law, an FCC
and NBC.
rule, originally adopted in 1985, discounted the number of
television households reached by stations operating in the
In 13 markets, both Nexstar and Tribune own television
ultra high frequency (UHF) band by half in measuring a
stations. In two of those markets, only one station is among
station owner’s reach. This adjustment reflected the
the Top Four. In two additional markets in which Nexstar
physical limitations of UHF signals at the time the rule was
owns Top Four stations, Tribune operates stations owned
adopted. Since then, stations have converted from analog to
by a third party.
digital service pursuant to a statutory mandate. As a result
of this switch, UHF stations had a technological advantage
In its application filed with the FCC, Nexstar stated that it
relative to other stations, and more broadcast television
intends to divest one of the Top Four stations in 10 markets.
licenses began to operate on these frequencies.
Nexstar intends to retain Tribune’s two Top Four ranked
television stations within the Indianapolis, IN, television
In April 2017, the FCC reversed a previous decision to
market (as well as Tribune’s satellite station), while
eliminate the “UHF discount.” In November 2017 it sought
divesting the two stations it currently owns.
comments on whether to retain or change the rule, but has
not reached a final decision.
In two additional markets, Wilkes Barre-Scranton-
Hazelton, PA, and Norfolk-Portsmouth-Newport News,
VA, Nexstar owns and/or operates stations and Tribune
With the UHF discount, Nexstar-owned stations currently
operates stations ranked among the Top Four. Pursuant to
reach 25.51% of all television households. Absent the
the FCC’s rules, Tribune is not considered to “control” the
discount, Nexstar’s national reach is 38.76%. Post-merger,
stations it operates. Nexstar has stated that it will “acquire
Nexstar’s reach would be 47.12% with the discount and
Tribune’s rights and obligations” with respect to those
72.57% without it. Nexstar has committed to divesting
stations and that it intends to “cause the divestiture” of the
stations in order to comply with the national ownership
stations. This phrasing does not specify whether Nexstar
rules. The number of stations it would need to divest may
intends to continue to operate the stations if the current
depend on whether the FCC modifies its rule on the UHF
owner, Dreamcatcher Broadcasting, divests them. If so, the
discount before or after it rules on the proposed merger.
merger might raise antitrust concerns, as Nexstar would
own and/or operate three Top Four stations in each market.
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Nexstar-Tribune Merger: Potential Competition Issues
Dana A. Scherer, Specialist in Telecommunications Policy

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