Rates for Cable Programming Service Tiers; External Costs

FEDERAL COMMUNICATIONS COMMISSION

47 CFR Part 76

[MM Docket Nos. 92-266, 93-215, FCC 95-343]

Rates for Cable Programming Service Tiers; External Costs

AGENCY: Federal Communications Commission.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: This Twelfth Order on Reconsideration (``The Order'') amends

the Commission's rules to eliminate the requirement that cable

operators, when adding home shopping channels to cable programming

service tiers, offset the per channel mark up with revenues received as

sales commissions from such home shopping channels.

EFFECTIVE DATE: February 23, 1996.

FOR FURTHER INFORMATION CONTACT:

Paul Glenchur, Cable Services Bureau, (202) 416-1150.

SUPPLEMENTARY INFORMATION: This is a synopsis of the Commission's

Twelfth Order on Reconsideration in MM Docket Nos. 92-266 and 93-215,

FCC 95-343, adopted August 7, 1995 and released August 8, 1995. The

complete text of this document is available for inspection and copying

during normal business hours in the FCC Reference Center, 1919 M St.

NW., Washington, DC, and also may be purchased from the Commission's

copy contractor, International Transcription Service (ITS) at 2100 M

St. NW., Washington, DC 20037, (202) 857-3800.

I. Introduction

1. In the Sixth Order on Reconsideration, Fifth Report and Order,

and Seventh Notice of Proposed Rulemaking (``Going Forward Order''), 59

FR 62614 (December 6, 1994), the Commission adopted rules providing

incentives for cable operators to add new channels to their cable

programming service tiers. Those rules allow operators a per channel

mark up of up to 20 cents. With respect to home shopping channels,

however, operators are required to offset this mark up with sales

commission revenues received from such channels. Several programming

entities, including Home Shopping Network, Inc. (``HSN'') and QVC, Inc.

(``QVC''), filed petitions for reconsideration of the sales commission

offset requirement. In this Twelfth Order on Reconsideration, the

Commission grants these petitions for reconsideration and eliminates

the home shopping offset requirement.

II. Elimination of Offsets

A. Background

2. Generally, an operator will pay a licensing fee to a programmer

for the right to carry that programmer's service. This licensing fee,

or program cost, is part of the overall cost that a programmer can

recover as an ``external cost'' when rates are adjusted to account for

the addition of a program service to an operator's channel lineup. In

an effort to ensure that an operator's program cost reflects the actual

cost of carrying a program service, the Commission, in the Report and

Order and Further Notice of Proposed Rulemaking, 58 FR 29736 (May 21,

1993), required that revenues received from a programmer, or shared by

a programmer with an operator, be netted against programming costs when

calculating net programming costs that can be recovered through

regulated rates.

3. In the Going Forward Order, the Commission established new rules

governing the amount by which an operator can mark up its rates in

addition to license fees to account for the addition of new channels to

its CPST. These rules establish a mark up per channel of up to 20 cents

subject to an overall cap of $1.20 for the first two years. Moreover,

in that Order, the Commission applied the revenue offsetting

requirement to the per channel mark up for channels added to Cable

Programming Service Tiers (``CPSTs''). Specifically, the Going Forward

Order provided that revenues received from programmers must be deducted

from programming costs and, to the extent revenues remain, from the

operator's mark up. Offsetting applies on a channel-by-channel basis.

In addition, the Going Forward Order reaffirmed that commissions

received by an operator from programmers will be treated as revenues

received from programmers. Thus, commissions received by operators must

first be netted against programming costs. Remaining commission

revenues must be deducted from the per channel adjustment.

B. Petitions for Reconsideration

4. A number of parties filed petitions for reconsideration in

response to the Going Forward Order. Home shopping entities such as

QVC, Inc. and Home Shopping Network, Inc. contend that requiring

operators to offset the operator's mark up with sales commissions

discriminates against home shopping services. They argue that other

programming networks offer advertising availabilities to operators and

the value represented by such advertising availabilities is not offset

against programming costs or the channel adjustment. In their view,

this establishes a regulatory disincentive to add home shopping while

encouraging the addition of traditional programming. Moreover, QVC

contends that mark ups for channels added to the CPST reflect ``network

costs'' which, unlike programming costs, are not as susceptible to

manipulation or artificial inflation. Consequently, QVC argues, a

primary purpose for restricting external cost recovery to net operator

cost is absent in the case of network cost recovery embodied in the

operator's mark up. HSN and Jones Infomercial Network further contend

that the regulatory complexity and burdens associated with the

accounting and offset of commission revenues discourage operators from

adding home shopping channels. Furthermore, Petitioner Black

Entertainment Television (``BET'') argues that the elimination of the

offset for sales commission revenues could benefit subscribers by

allowing sales commission revenues to cover some of its channel's

operating costs. In turn, BET asserts, operators would be less inclined

to raise subscriber rates for the service. BET also contends that the

offset rule discourages operators from carrying niche programming that

may contain both a traditional programming component and a shopping

service.

5. Several parties, in response to petitions for reconsideration,

have urged the Commission to retain the offset requirement for home

shopping revenues. The Arts and Entertainment Network favors retention

of the offset requirement. It argues that direct cash payments to

operators in the form of commissions encourage operators to base

programming choices on financial incentives offered by home shopping

services rather than on the quality of a channel's programming.

Lifetime TV argues that the offset requirement is needed to enable non-

shopping networks to compete for limited channel space on cable

systems. According to Lifetime, traditional program networks

[[Page 54816]]

cannot match the economic incentives of home shopping channels if

carriage of such channels allows recovery of both a channel adjustment

mark up and unrestricted revenue from sales commissions. With respect

to advertising availabilities, a number of respondents challenge the

petitioners' view that the absence of an offset for advertising

availabilities discriminates against home shopping channels.

Respondents argue that local advertising availabilities differ from

commissions because they do not involve direct cash compensation and

require operators to incur costs to produce advertisements and to

acquire equipment necessary to air them. In addition, ESPN claims that

home shopping channels are not disadvantaged in comparison to

traditional programmers because home shopping channels can also provide

advertising availabilities to local operators. Finally, the City of St.

Joseph and Benton Charter Township (West Michigan Communities), in a

petition for reconsideration, urge application of the revenue offset as

a tier-based adjustment rather than an adjustment on a channel-by-

channel basis. In response to the West Michigan Communities Petition,

QVC and Time Warner argue that governing statutes do not require tier-

based offsets and that Commission rules properly apply the offsets on a

channel-by-channel basis.

C. Discussion

6. Based on the petitions for reconsideration and other comments in

the record, we have determined that requiring operators to offset the

mark up with home shopping sales commissions creates a disincentive for

operators to carry home shopping services. Accordingly, in this Order,

we eliminate this requirement.

7. We agree with petitioners that requiring operators to offset the

per channel mark up with home shopping sales commissions creates a

disincentive for operators to add home shopping services. As we

explained in the Going Forward Order, the twenty-cent per channel

operator mark up falls within the historical range of rate increases

imposed by operators who add new channels and adjust their rates

accordingly in competitive environments. The allowance of this mark up

is independent of the type of programming or the program licensing fee

associated with adding the channel. Requiring operators to offset this

mark up with revenues derived from sales commissions effectively

eliminates the mark up in any case where commission revenues exceed

program costs to the operator (usually zero in the case of home

shopping channels) and the otherwise allowable mark up. Although we

presume that cash payments to the operator in the form of commissions

represent significant value to the operator, the partial or complete

elimination of the mark up for adding a home shopping channel is a

disincentive for an operator to add such a service. At the same time,

we recognize that other programming networks may offer local

advertising availabilities to operators for carriage of their services

without putting the mark up at risk. By reducing or eliminating the

operator mark up when home shopping channels raise sales commission

revenue for operators, the offset requirement effectively penalizes the

operator, and home shopping channels indirectly, by taking away the

mark up simply because many customers in the operator's territory

purchase products from the home shopping service. Consequently, the

offset requirement has the effect of disfavoring carriage of home

shopping services while favoring the carriage of traditional

programming services that can provide incentives to operators in the

form of advertising availabilities not subject to the revenue offset

rule.

8. As indicated above, some commenters argue that the Commission

does not have to treat offsets against sales commission revenues and

advertising availabilities in the same way to promote neutral

incentives to add channels. For example, it has been argued that

availabilities are different because operators may incur production and

equipment costs when utilizing the availabilities. Although advertising

availabilities may entail some production costs, as suggested by ESPN

and Lifetime Television, we believe that operators, as a general

matter, limit their utilization of availabilities to instances where

the net gain from such use exceeds the associated costs. Therefore, we

do not think commissions are so different from availabilities to

warrant granting different offset treatment. Finally, we are

unpersuaded by suggestions that, because home shopping services

theoretically could offer advertising availabilities, exempting the

value of advertising availabilities from the offset requirement does

not provide a comparative advantage to traditional networks. Generally,

home shopping channels, unlike traditional program networks, are not

developed or designed to attract commercial advertisers to air

advertising time as is traditionally the case with other programmers.

Consequently, advertising availabilities do not appear to be a viable

alternative for home shopping channels. Exempting the revenue offset

requirement for advertising availabilities creates an inherent

disparity between home shopping services and channels that have been

developed with the objective of becoming attractive advertising

vehicles.

9. The offset requirement for home shopping sales commissions also

creates administrative and practical difficulties. Although the channel

adjustment factor remains available to the operator if revenues from an

added shopping service fail to match the 20-cent markup, the operator

is still obligated to incur accounting costs and burdens, and some

degree of regulatory scrutiny, to ensure compliance with the revenue

offset rule. This burden may be sufficient to discourage an operator

from adding to the CPST an innovative shopping service or a hybrid

channel containing both additional programming and shopping services.

As a regulatory matter, the revenues derived from sales commissions can

vary with each reporting period which renders difficult the

incorporation of these fluctuations into the ratemaking process.

Indeed, the Commission has not applied the offset requirement to

advertising availabilities in part because of similar administrative

burdens. Recently, the Court of Appeals upheld as reasonable the

Commission's decision to forgo an offset requirement for advertising

revenues.

10. We recognize respondents' concerns that allowing operators the

ability to recover the 20-cent mark up regardless of the success of an

added shopping service enhances the economic attractiveness of adding

such channels. We reaffirm our belief, however, that Commission

regulations should not influence the operator's decision for or against

such services by making standard cost recovery available for carriage

of one type of program service but not another. The decision to add a

shopping service or a traditional programming service should be left to

the operator's business judgment. Similarly, we will not discourage

``traditional'' services from adding a shopping component or providing

advertising availabilities, with concomitant revenue incentives for

operators, to their program offerings. By eliminating the revenue

offset requirement as it applies to the operator's mark up, we

neutralize availability of the mark up as a factor in the operator's

decision to determine what kinds of program services should be added to

the CPST.

11. This Order does not affect our requirement that revenue from

shopping

[[Page 54817]]

commissions must be applied as an offset against program costs. We

remain concerned that a programmer's definition of program cost can be

manipulated to raise such costs artificially. Accordingly, we limit the

scope of this Order to the revenue offset requirement for home shopping

sales commissions as it applies to the per channel mark up only.

III. Regulatory Flexibility Act Analysis

12. Pursuant to the Regulatory Flexibility Act of 1980, 5 U.S.C.

601-12, the Commission's final analysis with respect to the Twelfth

Order on Reconsideration is as follows:

13. Need for and purpose of this action. The Commission, in

compliance with section 3 of the Cable Television Consumer Protection

and Competition Act of 1992, 47 U.S.C. 543 (1992), pertaining to rate

regulation, adopts revised rules intended to ensure that cable services

are offered at reasonable rates with minimum regulatory and

administrative burdens on cable entities.

14. Summary of issues raised by the public in response to the

Initial Regulatory Flexibility Analysis. Comments were filed in

response to the Initial Regulatory Flexibility Analysis. HSN and Jones

Informercial Network explain that operators face significantly less

complexity when deciding to carry traditional advertiser-supported

channels rather than home shopping services. They argue that

advertising availabilities represent value to operators and that such

value, unlike shopping commission revenue, need not be offset against

the channel adjustment mark up, rendering less burdensome the addition

of non-shopping channels.

15. Significant alternatives considered and rejected. In the course

of this proceeding, home shopping channels and other programming

entities submitted requests to delete shopping commission revenue from

the offset rule. This was the only proposal advanced by petitioners and

the only alternative to current rules considered in connection with

this specific action. In this Order, the Commission is providing relief

to certain programmers seeking the elimination of regulatory burdens

associated with the carriage of their channels.

IV. Paperwork Reduction Act

16. The requirements adopted herein have been analyzed with respect

to the Paperwork Reduction Act of 1980 and have been found to impose

new or modified information collection requirements on the public.

Implementation of any new or modified requirement will be subject to

approval by the Office of Management and Budget as prescribed by the

Act.

V. Ordering Clauses

17. Accordingly, it is ordered that, pursuant to sections 4(i),

4(j), 303(r), 612 and 623 of the Communications Act of 1934, as

amended, 47 U.S.C. sections 154(i), 154(j), 303(r), 532, 542(c) and

543, the rules, requirements and policies discussed in this Order are

adopted and part 76 of the Commission's rules, 47 CFR part 76, is

amended as set forth below.

18. It is further ordered that the petitions for reconsideration

filed by QVC, Inc. and Home Shopping Network, Inc. are granted

consistent with this Order. The Petition for Reconsideration filed by

the West Michigan Communities is denied.

19. It is further ordered that the regulations established in this

Order shall become effective February 23, 1996.

Federal Communications Commission.

William F. Caton,

Acting Secretary.

Amendatory Text

Title 47, Part 76 of the Code of Federal Regulations is amended as

follows:

PART 76--CABLE TELEVISION SERVICE

1. The authority citation for part 76 continues to read as follows:

Authority: 47 U.S.C. 543(c).

2. Section 76.922 is amended by revising paragraph (e)(3)(ii) to

read as follows:

Sec. 76.922 Rates for the basic service tier and cable programming

services tiers.

* * * * *

(e) * * *

(3) * * *

(ii) Per Channel Adjustment. Operators may increase rates by a per

channel adjustment of up to 20 cents per subscriber per month,

exclusive of programming costs, for each channel added to a CPST

between May 15, 1994, and December 31, 1997, except that an operator

may take the per channel adjustment only for channel additions that

result in an increase in the highest number of channels offered on all

CPSTs as compared to May 14, 1994, and each date thereafter. Any

revenues received from a programmer, or shared by a programmer and an

operator in connection with the addition of a channel to a CPST shall

first be deducted from programming costs for that channel pursuant to

paragraph (d)(3)(x) of this section and then, to the extent revenues

received from the programmer are greater than the programming costs,

shall be deducted from the per channel adjustment. This deduction will

apply on a channel by channel basis. With respect to the per channel

adjustment only, this deduction shall not apply to revenues received by

an operator from a programmer as commissions on sales of products or

services offered through home shopping services.

* * * * *

[FR Doc. 95-26526 Filed 10-25-95; 8:45 am]

BILLING CODE 6712-01-M