In the Matter of REQUEST FOR TEMPORARY WAIVER OF SECTION 76.501 OF THE COMMISSION'S RULES BY WARNER COMMUNICATIONS INC., AND CYPRESS COMMUNICATIONS CORP. With Respect to Cable Television Systems Serving Palm Springs, Bakersfield, and Environs, Shafter, Oildale, Wasco, McFarland, Delano, Taft, Taft Heights, South Taft, Ford City, and Victorville, Calif.; DeKalb and Sycamore, Ill.; Warsaw, Winona Lake, and Kosciusko County, Ind.; and Altoona and Lebanon, Pa.
FEDERAL COMMUNICATIONS COMMISSION
37 F.C.C.2d 260
RELEASE-NUMBER: FCC 72-826
September 19, 1972 Released
Adopted September 13, 1972
BY THE COMMISSION: COMMISSIONERS ROBERT E. LEE, REID, AND WILEY ABSENT; COMMISSIONER JOHNSON DISSENTING AND ISSUING A STATEMENT; COMMISSIONERS H. REX LEE AND HOOKS CONCURRING IN THE RESULT.
[*260] 1. The Commission has before it for consideration: (i) a "Joint Petition for Waiver of Section 76.501(a) of the Commission's Rules" n1 filed July 25, 1972, by Warner Communications Inc. (WCI) and Cypress Communications Corporation (Cypress) with respect to cable television systems serving Palm Springs, Bakersfield, Oildale, Shafter, Wasco, McFarland, and Delano, Taft, Taft Heights, South Taft, Ford City, and Victorville, California; DeKalb and Sycamore, Illinois; Warsaw, Winona Lake, and Kosciusko County, Indiana; and Altoona and Lebanon, Pennsylvania; n2 (ii) a "Supplement to Joint Petition for Waiver of Section 76.501(a)" thereto, filed August 25, [*261] 1972; and (iii) a "Further Supplement to Joint Petition for Waiver of Section 76.501(a)" filed September 1, 1972.
n1 Section 76.501 of the Rules provides, in pertinent part, that:
(a) No cable television system (including all parties under common control) shall carry the signal of any television broadcast station if such system directly or indirectly owns, operates, controls, or has an interest in: ... (2) A television broadcast station whose predicted Grade B contour... overlaps in whole or in part the service area of such system; or (3) A television translator station licensed to the community of such system... (b) The provisions of paragraph (a) of this section are not effective until August 10, 1973, as to ownership interests proscribed herein if such interests were in existence on or before July 1, 1970...: Provided, however, That the provisions of paragraph (a) of this section are effective on August 10, 1970, as to such interests acquired after July 1, 1970.
n2 Subsequent events have mooted that portion of the waiver request which deals with Altoona and Lebanon, Pennsylvania.
2. The joint petition was submitted in connection with a merger agreement which contemplates that Warner CATV Services, Inc., a wholly owned subsidiary of WCI, will be merged into Cypress, and that WCI will then acquire all issued and outstanding voting stock of Cypress. WCI, through subsidiaries, owns and operates 78 cable television system operations which serve approximately 190,000 subscribers in 23 states. n3 In addition, WCI has connections with various broadcast stations so that consummation of the proposed merger must result in violation of Section 76.501 of the Rules. n4 Cypress, directly or through subsidiaries, owns and operates 51 cable system operations which serve approximately 180,000 subscribers in 17 states. n5 Upon consummation of the agreement, WCI will be one of the larger system operators, but with substantially fewer than the approximately 639,300 subscribers served by TelePrompTer Corporation which has been the largest multiple system operator since the Commission approved its merger with H&B American, TelePrompTer Transmission of Kansas, Inc., 25 FCC 2d 469 (1970). n6
n3 As reflected in its Annual Report for 1971, WCI is an enterprise with diversified interests, largely in the communications field.
n4 Petitioners seek waivers with respect to the following cross-relationships: (1) a Cypress-controlled cable system at Palm Springs with Cypress-controlled Television Broadcast Translator Stations K70AL, K77AV, K73AD, licensed to Desert Hot Springs and Palm Springs, California; (2) Cypress-controlled cable systems at Bakersfield and environs, Shafter, Wasco, Oildale, McFarland, and Delano, with Station KBAK-TV, Bakersfield, a station in which Cypress principals have interests; (3) WCI-controlled cable systems at Taft, Ford City, South Taft, Taft Heights, and Victorville, California, with KBAK-TV; (4) WCI-controlled cable systems at Dekalb and Sycamore, Illinois, with Station WSNS-TV, Chicago, a station in which Cypress principals have interests; and (5) Cypress controlled cable systems at Warsaw, Winona Lake, and Kosciusko County, Indiana, with Station WKJG-TV, Fort Wayne, Indiana, a station in which WCI principals have interests.
n5 Cypress, a smaller company than WCI, is engaged principally in the cable television business although it is also engaged in the common carrier microwave relay and television translator business.
n6 In the Notice of Proposed Rule Making and of Inquiry in Docket No. 18891, 23 FCC 2d 833 (1970), we requested comments on a proposal that each cable operator be limited to a total of 2,000,000 subscribers (plus an additional 200,000 under given circumstances). WCI's approximately 370,000 subscribers would equal about 18.5 percent of the suggested limit.
3. Petitioners propose to consummate the merger late in September, 1972, in order to avoid risks for their stockholders, and possible deterioration of service to their subscribers, which might result from the uncertainties always attendant upon a merger. At the same time, petitioners hope to avoid losses which could result from distress sales of some systems which would be necessitated to achieve immediate compliance with Section 76.501 of the Rules. Accordingly, petitioners request waivers of Section 76.501 of the Rules which will permit them to execute their agreement, but will extend until August 10, 1973, or, alternatively, 90 days after final Commission action on the pending petitions for reconsideration of Section 76.501 of the Rules, the time in which they must complete divestiture. Petitioners state that steps have already been taken toward separation of some of the interests, and that they intend to make all efforts to complete an effective divorce of these common interests within the grace period finally determined by the Commission. Further, they represent that no subsequent request for waiver beyond the grace period as finally determined will be predicated upon grant of the instant petition.
[*262] 4. In support of the requested waiver, the petitioners argue generally that:
(a) The affiliations prohibited by Section 76.501(a) which give rise to their joint petition are merely incidental byproducts of a merger which is in all other respects in conformity with the Commission's rules. Of the 129 WCI and Cypress cable system operations, only the few instances described in the following paragraphs involve any Section 76.501 questions. Thus, taken as a whole, the Cypress-WCI merger will not have a significant effect on the purposes of Section 76.501.
(b) The public interest will be served by prompt consummation of the Cypress-WCI agreement since it will generate substantial additional financial resources which will further the development of Cypress cable television systems for the benefit of the public and will avoid such deterioration of the quality of service provided to Cypress' cable subscribers as might result from uncertainties accompanying extended delay.
(c) The waivers sought are of quite limited duration.
(d) The cross interests involved do not result in even the temporary creation of a significant concentration of local media control or diminution of program diversity. Indeed, in two instances (Palm Springs and the five Kerns County communities) the cross-interests, involving Cypress subsidiaries and Cypress principals, existed prior to July 1, 1970, and waiver is sought only to the extent necessary to permit these pre-existing common interests to continue until the expiration of the grace period finally specified by the very terms of the rule.
(e) In every instance, the common interests at issue herein arise from the overlap of UHF television facilities and cable television systems, and the applicability of the rule to these cases may be affected by Commission action on reconsideration.
(f) The grace period provided in Section 76.501 of the Rules, and the rationale of previous waivers of that section leave no doubt that good cause for waiver exists when the cross-interests do not present a significant incursion on the policy underlying the rule, and rigid application of the rule would result in the imposition of undue hardships. In this case -- in which denial of the petitioners' request for a temporary waiver would necessitate either delay in consummation of the merger agreement, with attendant financial risk to Cypress stockholders, or losses resulting from quick, distress sale of facilities referred to herein -- an appropriate balancing of the minimal effect of the waivers upon the purposes of Section 76.501 of the Rules against the hardships which would be imposed by denial of the requested waivers makes it plain that good cause for grant of the petition exists.
5. Having reviewed the general background of the waiver request, we will now consider the specific situations to which the waiver will apply. With regard to the cable systems serving Palm Springs, Bakersfield, Oildale, Shafter, Wasco, McFarland, and Delano, the petitioners assert that (as noted above) the cross-relationships in question came into existence prior to July 1, 1970, and that the degree of cross-interest will actually diminish as a result of the merger. Specifically, petitioners state that:
(a) H&B Translator Corporation, a wholly owned subsidiary of Cypress, is the licensee of UHF television broadcast translator stations serving Desert Hot Springs and Palm Springs, California. Another subsidiary of Cypress owns and operates the cable television system at Palm Springs.
(b) HarriScope Broadcasting Corporation is the licensee of Station KBAK-TV, Bakersfield, California, whose predicted Grade B contour includes cable I. Harris, and Jerry B. Greene are (1) stockholders, n7 and, respectively, chairman systems, owned and operated by a Cypress subsidiary, which serve Bakersfield, Oildale, Shafter, Wasco, McFarland, and Delano. Messrs. Irving B. Harris, Burt of the board, president and board member, and vice president-finance of Cypress, [*263] and (2) stockholders n8 and, respectively, board member, president and board member, and treasurer of HarriScope Broadcasting.
(c) Harris, Harris, and Greene, together with certain of their associates, have de facto control of Cypress, owning an aggregate of approximately 44.5% of the outstanding shares of Cypress common stock.
(d) Subsequent to execution of the Cypress-WCI agreement, WCI will have 100% control of Cypress, and Harris, Harris, and Greene will have neither de jure nor de facto control over WCI. Irving B. Harris will be neither an officer nor a director of WCI or any of its subsidiaries. Although Irving B. Harris and his associates will, immediately upon consummation of the merger own in an excess of 1% of WCI's voting stock, they will sell a portion of such holdings pursuant to a secondary offering expressly provided for in the merger agreement and will thereafter hold less than 1% of WCI voting stock. It is contemplated that Irving B. Harris' sale of WCI stock will take place within two weeks after consummation of the Cypress-WCI agreement. n9
n7 Their stock interests in Cypress are stated as: I. B. Harris, 15.2%; B. I. Harris, less than 4%, J. B. Greene, less than 1%.
n8 Their stock interests in HarriScope Broadcasting are stated as: I. B. Harris, 31.3%; B. I. Harris, 9.4%; J. B. Greene, less than 1%.
n9 At the same time, it is noted that Cypress' present officers, including Burt I. Harris, president; Leon Papernou, executive vice-president, and Jerry B. Greene, vice-president-finance, may continue to manage Cypress as servants of its parent corporation, WCI; that Greene is expected to resign as an officer of HarriScope Broadcasting to become vice-president and treasurer of TeleVision Communications, Inc. (a WCI subsidiary); and that HarriScope Broadcasting (which now has a less than 1% interest in Cypress) will, as a result of the exchange of stock, acquire a de minimis interest in WCI.
6. With regard to the cable systems serving Taft, Taft Heights, South Taft, Ford City, and Victorville, California; DeKalb and Sycamore, Illinois; and Warsaw, Winona Lake, and Kosciusko County, Indiana, the petitioners state that:
(a) The Taft, Taft Heights, South Taft, Ford City, and Victorville systems are owned by Continental Transmission Corporation, a WCI subsidiary, and lie within the predicted Grade B contour of Station KBAK-TV in which Cypress principals have interests (see paragraph 5(b) supra). None of them, however, will be an officer or director of Continental Transmission or have any involvement in day-to-day operation of the television station. Diminution of available program choice from diverse and antagonistic sources will be minimal since (1) only the Victorville system is required to originate programming, and (2) at least five television broadcast stations in addition to KBAK-TV place predicted Grade B or better signals over Taft, Taft Heights, South Taft, Ford City, and Victorville.
(b) Both the DeKalb and Sycamore systems are owned by a subsidiary of WCI's Continental Transmission Corporation, and lie within the predicted Grade B contour of Station WSNS-TV, Chicago, Illinois, which is owned by Video 44, A Joint Venture, which, in turn, is owned 50% by HarriScope of Chicago, Inc. Cypress principals have no involvement in the cable facilities or in the day-to-day operation of the station. And a number of television broadcast stations, in addition to WSNS-TV, place predicted Grade B or better signals over the cable system communities.
(c) Cypress' cable operation at Warsaw and Winona Lake and parts of Kosciusko County, Indiana, lies within the predicted Grade B contour of Station WKJG-TV, Fort Wayne, Indiana. The principals of WKJG-TV are WCI board members Alfred R. Stern and Raymond Armstrong together with certain officers of TeleVision Communications, Inc. (a WCI subsidiary). No reduction in program-source diversification will occur since (1) the cable system operation (which serves fewer than 3,500 subscribers) originates no programming, and (2) in any event four television broadcast stations in addition to WKJG-TV place predicted Grade B or better signals over the cable service areas.
7. Having considered the foregoing, the Commission is satisfied that the balance of equities in this case favors grant of WCI and Cypress' joint request for temporary waiver of Section 76.501 of the Rules. The elements leading to this judgment are that: (a) in some of the communities, the transfer of control of cable systems to WCI [*264] will actually reduce the degree of local system-station cross-interest during the remainder of the divestiture grace period; and (b) in all of the communities, (1) the duration of the waiver is by now quite small, (2) the transfers of control of the few systems in question will not significantly detract from the purposes of Section 76.501 of the Rules and are but minor incidents of a larger transaction which hopefully will generate substantial financial resources needed "to get cable moving so that the public may receive its benefits," Cable Television Report and Order in Docket No. 18397, 37 F.R. 3259 (February 12, 1972), and (3) in these circumstances, denial of a temporary waiver would threaten the petitioners with an unjustifiable financial hardship. Nonetheless, we note that no tax certificate will be issued by the Commission with respect to the termination through divestiture of any cross-interests created wholly de novo as a result of WCI's acquisition of control of Cypress. Compare Suburban Broadcasting Corporation, FCC 72-769, FCC 2d (adopted August 29, 1972).
8. Accordingly, IT IS ORDERED, That Section 76.501 of the Rule IS WAIVED with respect to the following facilities affected by the prospective transfer of control of Cypress Communications Corporation to Warner Communications Inc.: (1) cable television systems at Palm Springs, Bakersfield and environs, Shafter, Oildale, Wasco, McFarland, Delano, Taft, Taft Heights, South Taft, Ford City, and Victorville, California; DeKalb and Sycamore, Illinois; and Warsaw, Winona Lake, and Kosciusko County, Indiana; (2) Television Broadcast Stations KBAK-TV, Bakersfield, California; WSNS-TV, Chicago, Illinois; and WKJG-TV, Fort Wayne, Indiana; and (3) Television Broadcast Translator Stations K70AL, K77AV, and K73AD, Desert Hot Springs and Palm Springs, California.
IT IS FURTHER ORDERED, That such waiver shall expire on (1) August 10, 1973, or on (2) the 90th day following final Commission action on pending requests for reconsideration of the adoption of Section 76.501 of the Rules, whichever first occurs.
FEDERAL COMMUNICATIONS COMMISSION, BEN F. WAPLE, Secretary.
DISSENTING OPINION OF COMMISSIONER NICHOLAS JOHNSON
Section 76.501 of our new cable television rules prohibits a cable system from owning or operating a television station whose signals are received in the cable system's service area -- an effort to preclude a single organization from controlling more than one major broadcast outlet in a community.
Today the Commission waives this rule in order to help effectuate a merger between Warner Communications, Inc., and Cypress Communications Corporation. Aside from resulting in one of the largest cable-broadcast operations in the country, this merger will spawn numerous instances of the sort of cross-ownership against which section 76.501 is specifically directed.
[*265] The majority justifies its waiver on the ground that the cross-ownership will be temporary (at the most, it can last only until August 10, 1973, when the new corporation will have to have divested itself of all its offending interests), and also on the ground that, absent a waiver, this merger could not be consummated without creating some risks to the Warner and Cypress stockholders.
The majority has given far too little weight to the purposes underlying section 76.501. It has shown far too little concern for the goal of diversified media control and the public benefits which would inure from such diversification. In doing so, the majority has refused to abide by its own rules, rules which were devised after years of careful study.
And so, Warner and Cypress receive the same favored treatment we agreed to afford cable-broadcast conglomerates which existed prior to the date the Commission first passed its cross-ownership rules. Those previously existing systems were given a grace period during which to divest -- until August 10, 1973 -- because the Commission believed that immediate retroactive application of the rules would be economically disruptive.
I can find no good reason for offering such a grace period to a cable-broadcast conglomerate which is only now being contemplated. Under our rules, both Warner and Cypress should be forced to divest themselves of their offending interests before they consummate their merger.
The majority prefers to erase the risks inherent in divestiture, to favor the Warner and Cypress stockholders at a high cost both to the public and to the Commission's own rules. I dissent.