Business solutions to the alien ownership restriction.

• Author: Snodgrass, Greg

1. INTRODUCTION II. CONGLOMERATION AND THE BROADCAST LICENSE A. The Old Studio System B. The Foundation Crumbles 1. Antitrust 2. Television C. The New System 1. Disney 2. Time Warner 3. Sony 4. NBC Universal 5. Viacom 6. News Corporation 7. Summary III. RULES GOVERNING FOREIGN OWNERSHIP A. The Communications Act B. Impact in the Entertainment Industry C. Attempts at Circumvention IV. POSSIBLE SOLUTIONS A. Eliminating the Rule B. Restructuring Corporations C. Divestiture of Companies Owning Broadcast Licenses. V. CONCLUSION I. INTRODUCTION

   Since 1912, Congress has outlawed foreign ownership or control of a broadcast station. (1) This restriction is codified in its current form under the Communications Act of 1934 (1934 Act). (2) By looking at the extensive legislative history of these statutes, scholars have reached a consensus on two main reasons why Congress passed the rule. The first of the two reasons is based on national security. If a foreign-owned company were granted a broadcast license, it could use the station to broadcast propaganda or to jam American radio signals in times of war. (3) Secondly, the foreign ownership restriction can be viewed as a protectionist measure used to promote American ownership of American media, and to prevent foreign takeovers. (4)

   There has been a growing movement in scholarship over the past several decades to eliminate this ownership restriction. Some argue that foreign ownership poses no threat to national security anymore, or that the President can suspend the license under his war powers if such a threat arises. (5) Others argue that this restriction on trade hurts American interests abroad on reciprocity grounds, (6) as well as American interests at home by limiting the market value of broadcast stations. (7) On constitutional grounds, some argue that the alien ownership restriction presents an unwarranted limitation on speech. (8)

   At the same time, mass media has been simultaneously expanding and converging. Media companies have been discovering new markets and merging old ones with increasing rapidity over the last few decades. For example, the mobile phone ring tone market provided a huge boon to the cellular and music industries in the early- to mid-2000s ($600 million in 2006 alone), (9) and in the late 2000s, the introductions of so-called "smart phones" (such as Apple's iPhone) merged existing telephone and computer technologies into a single device. (10) While this revolution has tremendous potential, it has also created tremendous instability for the businesses involved. Companies have discovered that the best way to survive this instability is to fuse with other companies involved in different types of media, thus forming large, vertically integrated conglomerates.

   The alien ownership restriction has played a strong role in this reshuffling of the media and entertainment industries. These conglomerates require huge infusions of capital, especially upon formation. In today's increasingly international economy, fewer and fewer companies are fully owned or controlled by American citizens. This presents an obvious problem for any entertainment conglomerate that has broadcast licenses-in order to raise capital from foreign sources, the conglomerate must either divest itself of any company with a broadcast license, or that company could run the risk of losing the license, which could ruin its business.

   Much has been written about the foreign ownership restriction in its century of existence. There are excellent works arguing for the repeal of the statute, and other equally excellent works arguing for a reinterpretation of the statute for the sake of free trade. However, this Note approaches the foreign ownership restriction from a business perspective, and so does not argue for change, but rather explores the options available to a foreign-owned media conglomerate that wishes to have a presence in the American market. First, this Note will explain the necessity of the broadcast license within the conglomerate's business plan. It will then outline the rules governing foreign ownership and control. Finally, this Note will explore possible business solutions to mitigate the effects of the foreign ownership restriction.

2. CONGLOMERATION AND THE BROADCAST LICENSE

   In order to understand the necessity of a broadcast license to the modern entertainment conglomerate, it is important to first understand how these conglomerates developed. The unification of smaller, independent, and diverse companies into a larger whole began in the 1970s, but reached its zenith at the turn of the twenty-first century. (11) While some visionaries took advantage of market synergies as early as the 1940s, the system as a whole did not begin to capitalize on these synergies until the 1970S. (12) As the following discussion will show, the broadcast license is one of the most integral pieces of the puzzle.

   1. The Old Studio System

      Everything starts with the movies, both chronologically and financially. Ever since a small band of first-generation Americans moved west from New York to escape the harassment of Thomas Edison and his lawyers, Hollywood has been the entertainment capital of the United States. (13)

      The first few decades were known as the Golden Age of Hollywood, although the era was only gilded for some. Studios made extraordinary profits in the fledgling industry. Studio heads were able to count on high box office sales on the one hand, and extraordinarily low costs on the other. Actors were usually signed to seven-year contracts, and risked being blackballed if they broke their contract. (14) Writers were paid a weekly salary and were expected to chum out scripts to keep up with the rapid pace of production--up to six movies a month at some studios. (15) Rare was the contract that contained any kind of profit participation, where an actor or writer received additional sums based on the box office performance of the movie. (16)

      Furthermore, the studios usually owned most of the theaters in which their movies were shown. Even when the studio did not own the theater, it still wielded tremendous power over the theater, often forcing the theater to book films in blocks of ten. (17) The studio would put one or two popular movies in a block with many less successful movies, thus forcing the theaters to either pay for everything or get nothing--i.e., no audience. While the system did not work well for the exhibitors, it was lucrative for the powerful studios.

      High revenue and low costs kept the studios flush with profits all the way through the 1940s. In 1947, the six major studios earned $1.1 billion from their share of ticket sales, accounting for ninety-five percent of the studios' overall revenue. (18) This made the movie industry America's third largest retail business, behind grocery stores and the automotive industry. (19) Furthermore, the studios' net receipts (revenue alter distribution and advertising costs) were $950 million. (20)

   2. The Foundation Crumbles

      Two separate forces combined to revolutionize the movie industry. First, the Department of Justice (DOJ) began pressing an antitrust case against the major studios. (21) This case was an attempt to bring down the vertically integrated system where the content producers were also the content distributors (by virtue of owning the theaters). Second, television became an extremely popular form of entertainment. In just a few short years, it cut dramatically into box office sales.

      1. Antitrust

         In United States v. Paramount Pictures, Inc., (22) the studios were locked in a decade-long losing battle to maintain control over their system. The five major studios (Metro-Goldwyn-Mayer, 20th Century Fox, Warner Bros., RKO, and Paramount) were engaged in two practices that awoke the ire of the DOJ.

         First, the studios operated as vertically integrated businesses. A single company could undertake the production, distribution, and exhibition of a motion picture, without any help from outside companies. (23) While the studios claimed that it was necessary to own the means of distribution and exhibition in order to guarantee an outlet for the films they produced, (24)

         independent exhibitors complained that the major studios used this ownership for an unfair competitive advantage. When negotiating the exhibition of a movie with smaller, independent theater chains, the studios could threaten to show the movie only in studio-owned theaters, thus shutting the independent chains out completely. (25) Since the independent theaters had no substantial source for content outside the major studio production system, they were forced to accede to the studios' demands and receive less favorable contracts as a result.

         Second, the studios were engaged in "block booking." In the words of the Supreme Court, "Block-booking is the practice of licensing ... one feature or group of features on condition that the exhibitor will also license another feature or group of features released by the distributors during a given period. The films are licensed in blocks before they are actually produced." (26) For instance, Gone With the Wind was attached to a handful of other, less lucrative movies, and independent exhibitors had to choose between showing all of them or none of them; they could not simply choose to show Gone With the Wind and pass on the other films. (27)

         The Paramount case, which lasted from 1938 to 1948, was not the first time the studio system had run into antitrust issues. In fact, in 1921, the Federal Trade Commission (FTC) began pursuing the major studios for f their vertical integration and use of block booking. (28) In 1928, the DOJ filed an antitrust suit against the studios and successfully attacked their vertical integration and block booking. (29) The victory was hollow, though, as the Great Depression and the National Industry Recovery Act forestalled enforcement of the sentence against the studios. (30) In 1938, the DOJ again...