FCC Foreign Broadcast Ownership Proceeding to Come; OK of Pandora's KXMZ Buy May Be Next

Also expected is the eventual approval, probably by the Media Bureau acting on delegated authority, of Pandora's still-pending transfer application filed June 20, 2013, to buy KXMZ(FM) Box Elder, South Dakota, in an effort to qualify for a lower royalty rate for streaming. Monday's order gave Pandora 90 days to tell the commission how it intends to ensure it complies with the ruling letting foreigners own as much as 49.99 percent of the company. The American Society of Composers, Authors and Publishers in a statement Tuesday called Pandora’s purchase of KXMZ "a transparent ploy squarely aimed at paying songwriters even less for online music streams." It "serves as yet another example of the urgent need for reform of the nation’s music licensing system," said ASCAP.

Pandora agreed to pay about $600,000 for KXMZ, which it already operates under a local marketing agreement with the station's owner Connoisseur Media, noted industry officials including Honig, who runs MMTIC's broadcast brokerage. More than 42,000 Rapid City residents now use Pandora, said David Grimaldi, the company's director of public affairs. "We are excited to apply Pandora’s insights about listening habits to music programming that will reflect local listeners’ evolving tastes." Rapid City and Box Elder are less than 10 miles apart.

Once Pandora submits its compliance plan, as an amendment to its transfer application for the station, the bureau would OK if it deems it acceptable, predicted industry lawyers. They said the bureau could ask Pandora to make changes before OK'ing it, and likely will dismiss ASCAP's challenge to the deal and authorize the takeover. While staff approval is likely, the bureau will probably give Chairman Tom Wheeler's office a heads-up before acting, said broadcast lawyer David O'Neil of Rini O'Neil, an expert on radio deals and licensing. A bureau spokeswoman declined to comment.

Honig and other broadcast lawyers noted the upcoming proceeding would be a follow-on of sorts to an earlier one that led to a 2013 clarification that the commission would allow case-by-case decisions on foreign broadcast ownership above the threshold of 25 percent (see 1310250030). They noted that the declaratory ruling to Pandora was the first-ever commission approval of foreign ownership above 25 percent. Pandora couldn't wait for an upcoming proceeding before getting action on the declaratory ruling, said Melodie Virtue, a broadcast lawyer at Garvey Schubert representing the company. "We can’t wait forever. Rulemakings take a long time. So we needed the commission to act on what’s before it now."

Industry lawyers welcomed the declaratory ruling for providing some insight about what might be required for other broadcasters to get similar treatment but said more details are needed and they might be given in the upcoming proceeding. "While this answers some questions, it leaves many more unanswered" about what compliance would look like for other broadcasters, said O'Neil. "You had to start somewhere. Now you build on it." Honig said he was concerned Pandora might have spent more money to pay for shareholder surveys before the ruling than it's paying for KXMZ. "The cost of compliance with this obscure rule that has very little to do with the way the stations are operated -- or nothing in most cases," he said. "What they have been asked to do is certainly expensive," though Pandora may welcome "the clear path to a grant laid out for them with exactly what they need to do," said Honig.

Broadcast lawyer Lew Paper of Pillsbury Winthrop said he's eager to see how the bureau responds to Pandora's proposal, and what steps the company takes out of what he described as a menu of options the ruling gave the company to show foreign ownership won't be 50 percent or more. "The industry as a whole would benefit if you had some simplified procedure to satisfy the statute and the commission’s concern," he said of Communications Act Section 310(b)(4) that lets the agency block foreign broadcast ownership exceeding 25 percent if it finds it's not in the public interest. "There should be a procedure that would make it easy to make determination on the levels of foreign ownership and be able to comply with the statutory requirement." NAB still backs "easing of rules on foreign investment in U.S. broadcast properties," said a spokesman.

The ruling requires Pandora to change its articles of incorporation to let the board enforce the decision, to get information about citizenship of beneficial owners and those with voting rights and fix noncompliance. The company must certify its compliance with its FCC Form 323, filed every other year. "We expect Pandora Media to use sources other than shareholder mailing addresses or corporate headquarters locations," said the ruling. It said such steps could include using Depository Trust Corp. to put foreign-owned shares into a separate account for monitoring, checking SEC filings or getting citizenship information from those owning Pandora stock through a broker or bank.

Commissioners Mike O'Rielly and Ajit Pai said the foreign ownership process raised concerns. Calling the process and Pandora's wait for a declaratory ruling "absurd," Pai's concurring statement said "the best evidence in the record indicates that Pandora’s level of foreign ownership falls below the 25 percent statutory benchmark" and that other types of FCC licensees need not seek a declaratory ruling to be foreign owned. "FCC case law makes it uniquely difficult to invest in broadcast stations," he said. "The Commission should spend its time resolving actual controversies, not creating more work for ourselves. I am therefore pleased that we commit to examining in the near future whether we should revise our methodology for assessing compliance with the 25 percent statutory benchmark in the broadcast context." In a global economy, it's "impossible" for a publicly traded company to "establish the identity, let alone the nationality, of the majority of its shareholders," said O'Rielly. "I appreciate the Chairman’s commitment to work with me toward an overall liberalization of our broadcast-related foreign ownership rules, and this ruling’s clarification that the actions taken are specific only to this case and will not impact our discussions going forward."