NEWS ANALYSIS : Networks Can Enter Rerun Market

The three major broadcast networks, in a decision that will have major repercussions throughout Hollywood, were handed an important victory Thursday as the Federal Communications Commission eased rules barring them from the lucrative syndication business.

Signaling a major shift in the balance of power in Hollywood, the FCC decision could also make much easier the eventual merger of a network and a studio.

The FCC repealed many of the restrictions that have prohibited ABC, CBS and NBC from investing in hit shows such as “Roseanne” and “Home Improvement.”

The decision means the networks are largely free to invest in the multibillion-dollar TV program reruns market.

Although details have not been finalized, under the new rules TV producers could find themselves working for or in partnership with the major networks in program production. That would be a significant change in the way business has been conducted in Hollywood, where most producers are at the mercy of studios that finance their programs in exchange for equity stakes and “distribution fees.”

The FCC did not give the networks unfettered freedom to compete with the big Hollywood studios and independent producers that supply the majority of TV shows, however. Under pressure from Hollywood, the networks are still limited in investing in TV shows produced by non-network producers for the “first-run” syndication market, a fast-growing business for the major studios that encompasses most daytime “talk” programs and game shows.

“We got somewhere between half and three-quarters of a loaf,” a jubilant NBC President Robert C. Wright said of the decision. “We should begin to work on partnerships with producers almost immediately.”

The FCC voted 3 to 0 in favor of the new rules, with Commissioner Ervin Duggan dissenting on certain portions.

Not surprisingly, Hollywood executives bemoaned the FCC decision.

They said it hurt independent producers with little financial clout, which are in a weaker bargaining position when selling shows to the networks.

“This is a disaster for independent producers,” said Robert Daly, chairman of Warner Bros., the leading producer of prime-time TV programming. “They will be whip-sawed in their deals with networks. The networks will end up abusing their power.”

Daly and other Hollywood executives say the FCC’s new rules will allow networks to extract unfavorable concessions from producers. For example, Daly said, a network may require that it be given a share in the profit of a new show in exchange for putting it on the air.

The latest twist in the long-running saga of the FCC’s “financial interest and syndication rules” got underway last year, when a federal appeals court judge in Chicago ruled that the FCC’s 1991 compromise granting the networks limited entry into the syndication business was “unreasoned and unreasonable.”

The judge threw the proceeding back to the FCC, either to justify its rules or rewrite them.

At the heart of the “fin-syn” controversy is the question of whether the networks or Hollywood producers will control the potentially lucrative profits from reruns of popular prime-time TV programs and “first-run” syndicated talk shows and game shows.

Syndication can be an immensely profitable business. The reruns of “The Cosby Show,” for example, generated nearly $900 million in revenue, and first-run programs such as “The Oprah Winfrey Show” garnered $171 million last year.

The networks, facing increased competition from cable, independent stations, the Fox network and home video, want access to syndication revenue to offset their squeezed profits.

In the last few years, however, some of the sizzle has gone out of syndication, as a glut of shows swamped the market at a time when TV stations have less money to pay for them.

By giving networks the legal basis to share in syndication profits, the new rules could spur a merger of a network and a studio. Previously, a merger would have required a studio to sell its syndication division.

Portions of the new fin-syn rules will not take effect until consent decrees, which are overseen by U.S. District Judge Robert Kelleher in Los Angeles, are either lifted or modified.

The networks entered into the consent decrees with the Justice Department more than a decade ago, as part of a settlement, to stay out of the syndication business.

Observers expect Kelleher to act on the consent decrees sometime within the next year.

The biggest beneficiary of the FCC decision is Fox Broadcasting Co., the 7-year-old fourth network owned by Rupert Murdoch’s Fox film and TV studio.

Fox won exemption from the new rules and is free to operate a network while participating fully in syndication.

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FCC commissioners were said to have given the Fox network a break because it did not want to discourage an emerging network.

Commissioner Duggan, who has sided with Hollywood during much of the contentious proceeding, said Fox deserved a “dispensation.”

The networks, however, will be limited at least initially in the kinds of deals they can structure with Hollywood producers.

Although they can negotiate for financial stakes in an unlimited number of their programs, they nonetheless cannot syndicate those shows until two years after the consent decrees have been lifted.

At that time, the FCC’s new fin-syn rules “sunset,” and the networks will be allowed to go into syndication without restrictions.

The two-year moratorium also applies to the networks’ entering the “first-run” syndication marketplace, including for in-house produced shows. This represents a setback for the networks, since, under the 1991 fin-syn rules they were allowed immediately to syndicate the part of their schedule--up to 40%--they are allowed to produce in house.

Observers expect Hollywood immediately to begin lobbying the Justice Department to back away from its support for lifting the consent decrees.

Indeed, rumors circulated Thursday that Jack Valenti, president of the Motion Picture Assn. of America, had already scheduled a meeting next week with Atty. Gen. Janet Reno.

Valenti said he would not “speculate” about his options.

But Warner Bros.’ Daly said the focus now falls on the Justice Department in Hollywood’s campaign to keep the networks out of their business.

“I do know the Justice Department is where we still have a fight,” he said. “Justice is the place where we have to go.”

That makes some TV network executives extremely nervous. Although Reno has pledged to keep the Justice Department “out of politics,” the Clinton Administration owes several political debts to Hollywood, which campaigned heavily for Clinton’s election.

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The FCC and Syndication

The Federal Communications Commission Thursday partly freed the networks to get into the syndication business. The agency:

*Freed the three major TV networks from restrictions on acquiring a financial interest and/or syndication rights in network programming.

* Eliminated the 40% cap on in-house productions. The networks are now allowed to produce all their shows in-house.

* Maintained restrictions barring the networks from actively syndicating programming to the domestic market, regardless of whether the program was produced in-house by the network or not. The networks will only be permitted to syndicate their programming through an unaffiliated third party.

* Eliminated restrictions on networks actively syndicating programming in foreign markets.

* Allowed so-called emerging networks, such as Fox, to remain exempt from all restrictions except reporting requirements.

* Said all FCC financial syndication rules will expire two years after U.S. District Judge Robert Kelleher lifts consent decrees in which ABC, NBC and CBS agreed to stay out of syndication.