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Small businesses, struggling station owners, and new entrants would all benefit from what the Federal Communications Commission has laid out in its proposal for establishing a government-run incubator program. Radio companies would benefit too since, under the outline released, the incubator would give existing operators a shot at exceeding FCC ownership limits.

The incubator is a tandem component to a decision last November, when the Commission relaxed several ownership rules. It sees the program as way to diversify ownership by providing upstart companies with management and financial training and advice on technical and operational issues. It foresees the pairing of established broadcasters with newcomers to be especially beneficial in the task of helping struggling small businesses secure financing to get up and running.

“The incubator program would lead to greater diversity and competition in the broadcast industry,” FCC chair Ajit Pai said in a blog post. He has scheduled a vote at the Commission’s Aug. 2 meeting on launching the rulemaking process (MB 17-289) to create the broadcast incubator program.

Two-Pronged Eligibility Standard

As the proposal points out, the concept of an incubator program has been discussed since at least the early 1990s and has received general support from the radio and TV industry and beyond. But the Commission had never undertaken the creation of such a program and even went so far as to explicitly reject the idea in 2016 as part of a quadrennial media ownership review.

One of the biggest challenges for the FCC has been how to identify which would-be operators would qualify to take part in such a program. Its solution is a two-pronged eligibility standard that it aims to be both race- and gender-neutral as a way to avoid any complicated and potentially time-consuming hang-ups to getting the program rolling.

The basic requirements say new entrants participating in the incubator could own no more than three full-service AMs or FMs and no TV stations. And the potential incubated entity must also qualify as a small business under the Small Business Administration’s definition. That currently amounts to annual revenue of $38.5 million or less for radio. On top of that, the parties will need to secure the FCC’s approval for the proposed incubation relationship.

“The key factors guiding review of incubation proposals will be whether the potential incubated entity would have been able to obtain the necessary financing and support absent the proposed incubation relationship,” the draft order says.

No LMAs Allowed

As critical to deciding which companies can take part, the FCC is also setting up guidelines for what’s expected from that relationship. Typically that will mean an experienced broadcaster providing the newcomer with the support it wouldn’t be able to get on its own. One of the most important elements will be financial and operational support. Women and minority broadcasters have long complained about their inability to get the money they need to grow their business. The FCC opted not to set specific dollar minimums in its proposed incubator program however, saying a company that already owns a station or two may not need the same financial backing as owners with less experience. In other situations a station might be donated outright.

“The better approach is to give parties the flexibility to tailor an incubation plan to the needs of the incubated entity, the realities of the marketplace, and the needs of the community in which the incubated station operates,” the draft order says. The test for whether the resources provided are sufficient will be whether the incubated station can operate independently by hiring enough employees to oversee programming, engineering, sales, and station administration.

Ultimately, the experienced broadcaster must give the newcomer an option—but not an obligation—to buy the incubated station outright for a price not to exceed a fair market value. The veteran broadcaster would also be expected to help the new entrant secure the financing needed to make the purchase.

Yet even as the incubator is designed for “hands on” training, the FCC also sets up several guidelines to ensure that the incubated station maintains ultimate authority over station personnel, programming and finances. That means local marketing agreements will be off-limits and only limited use of joint sales agreements or shared services agreements will be allowed.

Under the proposal, the standard incubator relationship would run three years. That follows the recommendation submitted by the National Association of Broadcasters, which said that’s usually about how long it takes a new owner to get on its feet. But the FCC has also proposed to allow extensions of up to an additional three years. It also leaves open the door to allowing the partnership to end early.

Ownership Waiver Reward

Many broadcasters themselves had complained there are too few owners entering the business, and some were motivated by the sheer public service of taking part in the incubator program. But a far larger number will likely be enticed by a benefit being put on the table by the FCC as a reward for taking part.

The draft proposal would give existing broadcasters a waiver to the local radio ownership limits, including the AM/FM subcap, as an incentive to act as a mentor. The FCC says that would offer a “meaningful economic incentive” in order to encourage established broadcasters to commit the “substantial” resources needed. “We recognize that without active participation by incumbent broadcasters, any incubator program we design will be doomed to fail,” it tentatively concludes.

Some supporters have suggested the FCC offer tax credits similar to what had been used from 1978 to 1995. But the Commission says that would take an act of Congress, and efforts to secure that approval have been “unavailing” despite widespread support. It notes such an incentive could be added to the program if Congress were to ever act.

Under the proposal, once an incubation relationship is deemed a success, a company would have three years to use its ownership waiver. The company would be allowed to buy an FM or AM in the market where the incubation occurred or apply it in a “comparable” market of roughly the same size. “We believe this will expand opportunities for incubation by not limiting participants only to markets where the incubating entity is at or near the applicable local radio ownership limits,” the draft order says.

But there will also be limits. In order to preserve competition in the smaller markets, the FCC won’t allow a company to use its waiver in a market where it would secure control of more than half of the full-power radio stations.

A company would also only be allowed to incubate one station per market. The FCC says that would help ensure that the benefits aren’t limited to just a few ownership groups. The draft order does not limit how many stations in a market could have an incubation relationship.

The Commission’s draft order says the program will at least initially be focused just on radio, which the FCC says has traditionally been the more accessible entry point for new entrants and small businesses seeking to enter the broadcasting industry. One reason is that it costs considerably less to enter radio. Kagan said the average sales price for a radio station was about $1 million in 2016 compared to $53 million for a TV station.

The draft order also points out that the existing local radio market ownership caps will provide a “sufficient incentive” for incumbent broadcasters to participate. “But depending on our experience with the program and developments in the television sector, we are open to considering at a later date whether to expand the program to that market,” it says.