Fees for Ancillary or Supplementary Use of Digital Television Spectrum

FEDERAL COMMUNICATIONS COMMISSION

47 CFR Part 73

[MM Docket No. 97-247; FCC 98-303]

Fees for Ancillary or Supplementary Use of Digital Television

Spectrum

AGENCY: Federal Communications Commission.

ACTION: Final rule.

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SUMMARY: This Report & Order establishes a fee of five percent of gross

revenues received from ancillary or supplementary services for which

DTV licensees receive specified

[[Page 69209]]

compensation from third parties. This requires the Commission to

establish a program to assess and collect fees for digital television

(DTV) licensees' use of DTV capacity for the provision of ancillary or

supplementary services. The statute requires the imposition of a fee

where DTV licensees use their capacity for services for which the

payment of a subscription fee is required or where the licensee

receives revenues from a third party other than advertising revenues in

return for transmitting material furnished by the third party.

Licensees will be required to annually report to the Commission whether

they provided ancillary or supplementary subject to a fee and the

amount of fees to be paid to the Commission.

EFFECTIVE DATE: January 15, 1999.

ADDRESSES: Federal Communications Commission, 445 12th Street, Room TW-

A306, SW, Washington, DC 20554. In addition to filing comments with the

Secretary, a copy of any comments on the information collections

contained herein should be submitted to Judy Boley, Federal

Communications Commission, Room C-1804, 445 12th Street, SW,

Washington, DC 20554, or via the Internet to [email protected]. Comments

may also be filed by using the Commission's Electronic Comment Filing

System (ECFS), via the Internet to http://www.fcc.gov.e-file/ecfs.html.

FOR FURTHER INFORMATION CONTACT: Jerry Duvall, Chief Economist, Mass

Media Bureau (202) 418-2600, Susanna Zwerling, Policy and Rules

Division, Mass Media Bureau (202) 418-2140, or Jonathan Levy, Office of

Plans and Policy (202) 418-2030.

SUPPLEMENTARY INFORMATION: This is a summary of the Commission's Report

& Order, FCC 98-303, adopted November 19, 1998 and released November

19, 1998. The full text of this Commission Report & Order is available

for inspection and copying during normal business hours in the FCC

Dockets Branch (Room TW-A306), 445 12 St. S.W., Washington, D.C. The

complete text of this Notice may also be purchased from the

Commission's copy contractor, International Transcription Services

(202) 857-3800, 2100 M Street, N.W., Suite 140, Washington, D.C. 20037.

Synopsis of Report & Order

I. Introduction

1. With this Report & Order (``R&O''), the Commission establishes a

program for assessing and collecting fees for the provision of

ancillary or supplementary services by commercial digital television

(``DTV'') licensees as required by the Telecommunications Act of 1996

(``1996 Act''), Public Law 104-104, 110 Stat. 56, section 201 (1996),

codified at 47 U.S.C. 336. The rules promulgated pursuant to this R&O

implement the criteria of the 1996 Act, establishing a fee of five

percent of gross revenues received from certain ancillary or

supplementary uses of the DTV bitstream. Consistent with the 1996 Act,

the fee will be assessed on revenues from all ancillary or

supplementary services for which the licensee receives compensation

other than advertising revenues used to support broadcasting.

II. Background

2. The 1996 Act established the framework for licensing DTV

spectrum to existing broadcasters, and permitted them to offer

ancillary or supplementary services consistent with the public

interest. 47 U.S.C. 336. In the 1996 Act, Congress directed the

Commission to require that any ancillary or supplementary services

carried on DTV capacity: (1) must be consistent with the advanced

television technology designated by the Commission (``the DTV

Standard''); (2) must avoid derogating any advanced television services

that the Commission may require; and (3) must, with specified

exceptions, be subject to Commission regulations applicable to

analogous services. Congress also gave the Commission discretion to

prescribe such other regulations with respect to ancillary or

supplementary services ``as may be necessary for the protection of the

public interest, convenience, and necessity, 47 U.S.C. 336(b)(5).

Moreover, Congress directed the Commission to establish a fee program

for any ancillary or supplementary services for which the payment of a

subscription fee is required to receive such services or for which the

licensee receives any compensation from a third party other than

commercial advertisements used to support non-subscription broadcasting

(hereinafter referred to as ``feeable ancillary or supplementary

services''). 47 U.S.C. 336(e).

3. In a number of recent orders, the Commission adopted rules

implementing the transition to DTV pursuant to the 1996 Act. In the

Fourth R&O in MM Docket No. 87-268, 62 FR 14006 (March, 1997), the

Commission adopted the DTV Standard that supports the transmission of

High Definition Television (``HDTV''), as well as allowing for the

transmission of multiple programs of standard definition television

(``SDTV'') and non-video services. This Standard permits the provision

of other services, including large amounts of data. For example, a DTV

licensee will be able to transmit ``telephone directories, stock market

updates, * * * computer software distribution, interactive education

materials or virtually any other type of information.'' The DTV

Standard ``allows broadcasters to send video, voice and data

simultaneously and to provide a range of services dynamically,

switching easily and quickly from one type of service to another.''

4. In the Fifth R&O in MM Docket No. 87-268, In the Matter of

Advanced Television Systems and Their Impact upon the Existing

Television Broadcast Service, 62 FR 26966 (May, 1997), the Commission

we assigned the initial DTV licenses and established rules allowing

broadcasters to use their DTV capacity to provide ancillary or

supplementary services which ``do not interfere with the required free

service.'' The Commission stated that the DTV licensees' ability to

provide ancillary or supplementary services in addition to the mandated

free television service ``allow[s] the broadcasters flexibility to

respond to the demands of their audience'' for such services. This

flexibility ``should encourage entrepreneurship and innovation'' and

will give ``broadcasters the opportunity to develop additional revenue

streams from innovative digital services.''

5. The 1996 Act charged the Commission with establishing a means of

assessing and collecting fees for feeable ancillary or supplementary

services. Last December, the Commission issued a Notice of Proposed

Rule Making in MM Docket No. 97-247, In the Matter of Fees for

Ancillary or Supplementary Use of Digital Television Spectrum Pursuant

to section 336(e)(1) of the Telecommunications Act of 1996, 63 FR 00460

(January, 1998), which sought comment on various issues relating to the

establishment of a fee program in accordance with the 1996 Act. The

Notice of Proposed Rule Making, invited comment on all aspects of the

proposed fee program and proposed several methods of assessing such

fees, including a fee based upon a percentage of revenues received from

the ancillary or supplementary use of the digital bitstream, or a fee

based upon a hybrid of a flat rate and a percentage of revenues.

III. Issue Analysis

A. Goals

6. The 1996 Act sets forth general criteria the Commission must

follow in assessing fees for ancillary or supplementary services

carried on the

[[Page 69210]]

DTV bitstream. First, the 1996 Act requires the Commission to establish

a program which recovers ``for the public a portion of the value of the

public spectrum'' made available for ancillary or supplementary use by

DTV licensees. Second, the statute requires that the fee be designed

``to avoid unjust enrichment'' of broadcast licensees through the

method used to permit digital use of the spectrum. These provisions

recognize that existing DTV licensees received their licenses without

charge, while providers of potentially competing services may have paid

for the spectrum used to provide these services. Finally, the 1996 Act

requires that the fee recover ``for the public an amount that, to the

extent feasible, equals but does not exceed (over the term of the

license) the amount that would have been recovered'' in an auction.

This requirement refers to the competitive bidding provisions of the

Communications Act of 1934. As discussed fully below, the fee program

established today is consistent with these criteria as set forth in the

1996 Act. In addition, consistent with our goal of promoting the

efficient deployment of digital television, in implementing the

statutorily mandated fee program, the Commission seeks to avoid

dissuading broadcasters from using the DTV capacity to provide feeable

ancillary or supplementary services.

7. The 1996 Act also generally defines which ancillary or

supplementary uses of the DTV bitstream are subject to a fee. Section

336(e)(1), adopted by the 1996 Act, requires a fee to be assessed upon

any services ``for which the payment of a subscription fee is required

in order to receive such services'' or ``for which the licensee

directly or indirectly receives compensation from a third party in

return for transmitting materials furnished by such third party.'' In

the latter case, the 1996 Act specifically exempts from the fee any

ancillary or supplementary service which relies for its revenues upon

``commercial advertisements used to support broadcasting for which a

subscription fee is not required.'' Thus, a fee must be assessed on any

ancillary or supplementary service for which a subscription fee is

required or for which the licensee receives any compensation for

transmission of material other than commercial advertisements used to

support broadcasting. These services previously have been defined as

``feeable ancillary or supplementary services.'' The Commission noted

that feeable ancillary or supplementary services may be offered

simultaneously with other services, including HDTV, SDTV, or other

video programming supported entirely by commercial advertisements, or

with other non-feeable ancillary or supplementary services. The fact

that a feeable ancillary or supplementary service is being transmitted

by the DTV licensee does not subject all simultaneously transmitted

services to a fee.

8. In establishing fees for the ancillary or supplementary use of

DTV capacity, the Commission was cognizant of the administrative

burdens which such fees could entail. In order to minimize these

burdens both for broadcasters and for the Commission, the fee program

established is intended to be simple to understand, and calculable with

readily available information. An overly complex fee program could be

difficult for licensees to calculate and for the Commission to enforce

and could create uncertainty that might undermine a DTV licensee's

efficient planning of what services it will provide.

B. Basis of Fee

9. Background. In the Notice of Proposed Rule Making we set forth

several fee options which we determined to be consistent with the

guidelines of the 1996 Act. The options included a fee akin to the

amount that would have been received in an auction of the spectrum, a

fee based upon the net revenues or incremental profits from the

ancillary or supplementary use of a licensee's DTV capacity, a fee

assessed as a percentage of the gross revenues received for the

ancillary or supplementary use of this capacity, and a fee based upon a

hybrid of a flat rate and a percentage of revenues.

10. In describing the various fee options in the Notice of Proposed

Rule Making, the Commission described the advantages and disadvantages

of each. The Commission stated that while net revenues or incremental

profits could serve as effective proxies for the value of DTV capacity

used for feeable ancillary or supplementary services, the process of

ascertaining the costs involved in calculation of net revenues or

incremental profits would involve the burdensome apportionment of

expenses between free television services and feeable ancillary or

supplementary services and among ancillary or supplementary services.

Another fee approach suggested was a combination of a flat dollar

amount and a percentage of gross revenues, which would include a

uniform means of preventing unjust enrichment but would also create an

up-front cost, which could serve as a disincentive to broadcasters'

provision of feeable ancillary or supplementary services.

11. In the Notice of Proposed Rule Making, the Commission expressed

an inclination to favor a fee program that incorporates gross revenues.

Such a fee would ``foster our goal of creating a fee structure which

does not dissuade broadcasters from offering feeable ancillary and

supplementary services [and]. * * * would be straightforward to assess

and calculate.''

12. Comments. Virtually all of the commenters supported a fee based

upon gross revenues. The commenters agreed with the Commssion's

assessment that a fee based upon gross revenues could be the simplest

to calculate and enforce. Commenters also agreed that a fee based upon

gross revenues would satisfy the statutory criteria of preventing

unjust enrichment, recovering for the public a portion of the value of

the spectrum, and approximating, without exceeding, the amount which

would have been received at auction.

13. Decision. The Commission adopted a fee based upon a percentage

of the gross revenues generated by feeable ancillary or supplementary

services. We believe this approach is consistent with the 1996 Act,

supported by sound economic principles, and grounded in simplicity. We

also believe it will afford broadcasters flexibility in developing new

and innovative DTV services. A gross revenues approach is consistent

with the 1996 Act because it enables the Commission to assess a fee

that recovers for the public a portion of the value of the spectrum and

prevents the unjust enrichment of broadcasters through the use of the

DTV bitstream for feeable ancillary or supplementary services. While

the amount recovered will be more a result of the percentage rate of

the fee than of the nature of revenues on which the fee is based,

commenters overwhelmingly support a fee based upon gross revenues as a

means of achieving these important statutory goals.

14. The Commission stated that a fee based upon gross revenues is

consistent with the statutory directive that it assess a fee that ``to

the extent feasible, equals but does not exceed (over the term of the

license) the amount that would have been recovered had such services

been licensed'' at auction. As stated in the Notice of Proposed Rule

Making, and as echoed in many comments, it would be difficult if not

impossible to determine the amount that would have been received at

auction. To the extent possible, however, the Commission stated that a

fee based upon gross revenues can function as a proxy for auction

value.

[[Page 69211]]

15. The microeconomic theory supporting this determination is laid

out in the Notice of Proposed Rule Making. Briefly, economic theory

indicates that gross revenues received from the ancillary or

supplementary use of DTV capacity are related to the implicit value of

that DTV capacity. The postulated relationship between gross revenues

received from ancillary or supplementary services and the value of the

bitstream used to provide those services was supported by a number of

commenters, who found this economic rationale to be ``theoretically

sound.''

16. In determining the basis of the fee, the Commission sought not

only to comply with the criteria set forth in the Act, but also to

foster the important goal that the fee program be simple to comply with

and to enforce. As discussed above, a fee program based upon net

revenues or incremental profits would have entailed burdensome

accounting by the licensees and enforcement and auditing by the

Commission. Using gross revenues as the basis of the fee will minimize

the accounting and auditing required, permitting licensees to calculate

the fee based upon readily available information. It will also make the

Commission's administration of the fee program much more efficient, and

impose considerably fewer paperwork and compliance burdens on

licensees.

17. Finally, the Commission stated that a gross revenues approach

will serve the public interest goal of giving broadcasters flexibility

to develop new uses of the DTV bitstream. In the Notice of Proposed

Rule Making, the Commission stated its intention to establish a fee

program which allows broadcasters the flexibility to provide new

services and made clear that it is not its intention to dissuade

broadcasters from using the DTV capacity to provide feeable ancillary

or supplementary services. Commenters generally supported this goal

and, given the costs of implementing and enforcing a program based on

net revenues, agreed that a fee based upon a percentage of gross

revenues would be the least likely to discourage the development of new

uses of broadcast spectrum. Accordingly, the Commission rejected the

net revenues approach. A fee based upon a percentage of gross revenues

received would not involve up-front costs, such as those that would be

incurred by a hybrid fee based on a flat fee coupled with a percentage

of gross revenues, that could dissuade broadcasters from initiating new

services. In addition, the uniform application of a fee based upon

gross revenues to all feeable ancillary or supplementary services (as

opposed to a varying fee based on the type of service provided) will

minimize the potential of the fee program to affect broadcasters'

choice of one service over another. Finally, the percentage rate of the

fee, not the revenues on which the fee is based, will ultimately affect

broadcasters' decisions as to whether or not to offer feeable ancillary

or supplementary services at all.

C. Percentage of Revenues

18. Background. As stated in the Notice of Proposed Rule Making,

the percentage rate of the fee must reflect the statutory requirements

that the fee recover a portion of the value of the spectrum used for

these services, avoid unjust enrichment, and approximate the revenue

that would have been received had these services been licensed through

an auction. The Notice of Proposed Rule Making also indicated our

disinclination to set the percentage rate so high that it would

dissuade broadcasters from providing feeable ancillary or supplementary

services.

19. Comments. Commenters advocated percentages for the fee that

ranged from less than one percent to more than ten percent. Those

commenters who proposed a low fee--two percent or less of gross

revenues--based their proposal on the declining auction values of the

nonbroadcast spectrum, and on the possibility that a higher fee would

discourage broadcasters from offering innovative services. Commenters

proposing a high fee--ten percent or more--argued that such a fee would

be consistent with other government licensing fees, and would be

necessary to prevent unjust enrichment, as required by the 1996 Act.

20. Decision. The Commission set the fee for feeable ancillary or

supplementary services provided on the DTV bitstream at five percent of

gross revenues received from these services. The Commission stated that

a fee of five percent of gross revenues fulfills its statutory

obligations to impose a fee which recovers for the public some portion

of the value of the spectrum, prevents the unjust enrichment of

broadcasters providing feeable ancillary or supplementary services, and

approximates, to the extent possible, the revenues that would have been

received had the spectrum on which these services are provided been

licensed through an auction. The Commission also stated that a five

percent fee will not dissuade broadcasters from using their DTV

capacity to provide new and innovative services that can greatly

benefit consumers.

21. As stated in the Notice of Proposed Rule Making, the Commission

must carefully balance potentially competing requirements and goals in

establishing a percentage rate of the fee. On the one hand, a fee set

too high might dissuade broadcasters from providing feeable ancillary

or supplementary services, and could therefore reduce the benefits that

consumers receive from efficient deployment of DTV capacity. On the

other hand, a fee set too low might not prevent the unjust enrichment

of DTV licensees as required by the 1996 Act and might not recover an

amount approximating the amount that would have been recovered at

auction, although it could recover for the public a ``portion of the

value'' of the spectrum.

22. The Commission stated that a fee of five percent of gross

revenues best serves its goals and the requirements of the statute. The

1996 Act gives the Commission broad discretion in setting the amount of

the fee for ancillary or supplementary services, relying upon the

predictive judgment of the agency in that regard. In addition, no

commenter has pointed to any obvious or commonly accepted formula for

setting a fee in these circumstances. Therefore, the Commission must

use its best judgment in balancing the relevant goals.

23. The five percent fee satisfies the statutory mandate that the

fee be high enough to prevent the unjust enrichment of the licensees

and to recover compensation for the DTV capacity used by the licensees.

The Commission takes seriously the intent of the 1996 Act that

broadcasters providing feeable ancillary or supplementary services on

the DTV bitstream be required to pay more than a nominal fee. We

believe that a five percent fee is appropriate.

24. A fee set at five percent of gross revenues also satisfies the

statutory requirement that the fee recover ``an amount that, to the

extent feasible, equals but does not exceed'' the amount that would

have been recovered at auction. Looking at this mandate through the

prism of economic theory, the reference to auctions invokes a system

designed to foster the efficient allocation of resources and suggests

that we should set a fee that fosters efficient resource allocation.

The efficient allocation of the resource of DTV bitstream will allow

the marketplace to provide those feeable ancillary or supplementary

services demanded by consumers. A fee based on gross revenues will

allow such efficient allocation so that it meets the statutory

requirement.

[[Page 69212]]

25. In setting the fee at five percent of gross revenues, the

Commission takes into account the costs broadcasters will incur in the

development of digital ancillary or supplementary services. While we

note the comments of NCTA stating that a fee set too low would unfairly

subsidize broadcasters, we are conscious of the financial burdens faced

by digital television broadcasters in the coming years. As will be

discussed at greater length below, the Commission anticipates that the

fee assessment program established here will be reviewed and possibly

adjusted within the five year period prescribed by the 1996 Act, and

that such review will take into account the actual costs of the

development of digital ancillary or supplementary services.

26. Commenters advocating a higher fee have argued that fees for

the ancillary or supplementary use of the DTV bitstream are analogous

to mineral and oil royalty rates, which range from 12 to over 17

percent. The Commission rejected this analogy, stating that the policy

and economic considerations in setting DTV ancillary and supplementary

fees are quite distinct from the considerations that would be relevant

for leasing resources such as minerals or oil. The economic analysis

detailed in the Notice of Proposed Rule Making specifically addresses

the efficient allocation of DTV spectrum between free, over-the-air

television service and feeable ancillary services, not the general

issue of royalty rates. That economic analysis also addresses the

unjust enrichment which may result from the provision of comparable

services by competitors, such as multichannel video service providers

and other competing service providers, which have incurred sunk costs

that do not accrue to DTV licensees.

27. The Commission also rejected commenters' analogy to recent

auction rates for non-broadcast spectrum. Commenters argued that the

Commission should set the fee at a rate lower than five percent based

upon analyses they have submitted that purport to demonstrate that the

value of non-broadcast spectrum available at auction has been declining

in recent months. These commenters argue that these studies demonstrate

that the fees for the ancillary or supplementary use of the broadcast

spectrum should be set very low, as the fees should recover

approximately the amount which would have been received at an auction

of the spectrum.

28. In arguing for very low fees, some commenters have drawn an

analogy to copyright royalty rates, which are very low, rather than

royalties for mining and oil, which are higher. The Commission stated

that the policy concerns and economic considerations of our analysis

here are quite distinct from the considerations of privately-

contracting parties negotiating copyright royalty rates.

29. Based upon the foregoing, the Commission determined that a fee

set at five percent of gross revenues received from the ancillary or

supplementary use of the DTV bitstream will best satisfy the

requirements of the 1996 Act and will not discourage the provision of

these new services by DTV licensees.

D. Services on Which Fee is to be Assessed

30. In establishing a fee assessment program, the Commission

determined which services are subject to the fee. The fee program

established today applies only to ancillary or supplementary services.

While it specifically refers to ancillary or supplementary services,

section 336 does not define these services. Consistent with the 1996

Act and Commission precedent, Commission rules specify that ancillary

or supplementary services ``include, but are not limited to computer

software distribution, data transmissions, teletext, interactive

materials, aural messages, paging services, audio signals, [or]

subscription video.'' Our rules also specify that ``any video broadcast

signal provided at no direct charge to viewers shall not be considered

ancillary or supplementary.'' 47 CFR 73.624(c).

31. Pursuant to the 1996 Act, not all ancillary or supplementary

services are feeable. We determine that all revenue from subscription

services will be subject to a fee. In addition, as required by the

statute, ancillary or supplementary services for which the licensee

directly or indirectly receives compensation from a third party in

exchange for the transmission of material provided by the third party,

other than commercial advertisements used to support broadcasting, will

be subject to a fee.

32. Commenters provided very little guidance as to what services

DTV licensees will provide. With this R&O, the Commission resolved

several questions raised by commenters regarding particular types of

services, and set out general principles that may be used to determine

whether other non-subscription ancillary or supplementary services are

subject to fees.

Viewer-paid Subscription Services

33. As discussed above, the 1996 Act requires the Commission to

establish a fee program for any ancillary or supplementary services

``for which the payment of a subscription fee is required in order to

receive such services.'' The legislative history of the 1996 Act

indicates that the statute requires that a fee be assessed on ``any

ancillary or supplementary service if subscription fees or any other

compensation fees apart from commercial advertisements are required in

order to receive such services.''

34. The Commission stated that consistent with the 1996 Act, it

will assess fees on all revenue--both subscription and advertising

revenue--from all ancillary or supplementary services for which viewers

must pay subscription fees to receive. The Commission rejected

commenters' argument that advertising revenues from subscription

services should not be subject to the fee. First, section 336(e)(1)(A)

makes clear that those services for which ``the payment of a

subscription fee is required in order to receive such services'' are

feeable. The exclusion in section 336(e)(1)(B) for ``commercial

advertisements used to support broadcasting for which a subscription

fee is not required'' does not support NAB's position. Advertising

revenues from services that cannot be received without payment of

subscription fees do not fit within this exemption. The Commission

therefore declined to allow DTV licensees to exclude from gross

revenues subject to a fee advertising revenues received from services

for which a subscription fee is also required. The Commission stated

that such an approach would not be consistent with the statute and

would unduly complicate the fee program.

Non-Subscription Ancillary or Supplementary Services for Which Licensee

Receives Compensation From a Third-Party

35. The 1996 Act directs that fees be assessed on ancillary or

supplementary services ``for which the licensee directly or indirectly

receives compensation from a third party in return for transmitting

material furnished by such third party (other than for commercial

advertisements used to support broadcasting for which a subscription

fee is not required.)'' The Commission's rules state that over-the-air

video programming provided at no charge to viewers is not an ancillary

or supplementary service. This provision therefore applies to ancillary

or supplementary services, consisting of material which does not

originate with the licensee, which the viewer can receive without

payment of a fee. These ancillary or supplementary services may

[[Page 69213]]

include data, audio, or any other ancillary or supplementary services

that may be established in the future.

Home Shopping and Other Direct Marketing Programming

36. Commenters argued that the statute requires fees to be imposed

when broadcasters receive payments from sales on home shopping

channels, infomercial and direct marketing programming. The Commission

declined to impose fees on revenues received from home shopping,

infomercial or direct marketing programming. The Commission stated that

the purpose of this proceeding is not to exact fees from existing

broadcasters for existing services but, rather, to design a program for

the assessment of fees on ancillary or supplementary services which

will be provided on the DTV bitstream. The Commission agreed with the

commenters who argued that home shopping and infomercials are

commercial advertisements, excluded by statute from the scope of

ancillary and supplementary services as they are video services

received by viewers without a fee. The Commission found that home

shopping channels and infomercials are free, over-the-air television

services, supported by commercial advertisements, and not subject to a

fee.

Retransmission Consent Agreements

37. Commenters raised the issue of whether in-kind consideration,

in the form of retransmission consent agreements, constitutes

compensation from a third party for the purposes of the 1996 Act. The

Commission stated that a retransmission consent agreement constitutes

the payment of compensation by a third party to a licensee in exchange

for the transmission of material provided by that third party. A

retransmission consent agreement involves in-kind consideration given

to a licensee by a cable system operator for carriage of the licensee's

programming on the cable system. It is not compensation given to the

licensee for carriage of programming provided by a third party on that

licensee's frequency.

Noncommercial Licensees

38. In the Notice of Proposed Rule Making the Commission sought

comment on the question of whether noncommercial television licensees

should be exempt from fees or subject to lower fees. This argument was

raised initially in the Petition for Reconsideration of the Fifth R&O

filed by the Association of America's Public Television Stations and

the Public Broadcasting Service. Petitioners further sought a

determination as to whether they might offer feeable ancillary or

supplementary services on their DTV capacity as a source of funding for

their public television operations. Because the Commission has not yet

determined whether or to what extent noncommercial licensees may

provide revenue-generating ancillary or supplementary services, it

stated that it is premature to determine whether such services would be

subject to a fee and whether that fee should be lower than that paid by

commercial broadcasters. The Commission instead initiated a proceeding

in which it will build a record on noncommercial licensees'

remunerative use of the DTV bitstream and whether and in what

circumstances such uses would be subject to fees. The Commission stated

that it will address the comments received on this issue in that

proceeding.

E. Commencement of Fee Assessment

39. Some commenters asked that the Commission delay imposing a fee

on ancillary or supplementary services and proposed several different

plans for such delay. The Commission stated that it would not delay the

imposition of fees for ancillary or supplementary services. Even

assuming that the Commission has authority to impose such a delay, a

delay in the imposition of a fee would not serve the public interest.

In addition, the Commission stated that a delay in the imposition of a

fee would result in unjust enrichment during the time the broadcasters

were providing feeable ancillary or supplementary services but were not

paying a fee. A delayed fee would not effectively recover the value of

the spectrum. The fee program established today is designed to minimize

any detrimental effect the fee might have on the development of new and

innovative services. A delay in the imposition of a fee would therefore

be superfluous. Indeed, with a revenue based approach, as opposed to a

flat fee, licensees will not have to commence paying a fee until they

begin to collect revenues.

F. Other Issues

Cap on the Amount of the Fee

40. One commenter argued that the Commission should cap the

aggregate payments made by any broadcaster for feeable services. The

statutory provision referenced is the provision which states that the

fee shall recover an amount that ``equals but does not exceed'' the

amount that would have been recovered at auction. This statutory

provision does not require us to establish a cap on the fee amount. As

discussed above, gross revenues from feeable ancillary or supplementary

services are related to the implicit value of the DTV spectrum used to

provide such services. If the Commission were to establish an upper

limit on the total fees that it collected, then the theoretical linkage

established in our analysis would no longer hold, and the Commission

would fail to satisfy its mandate from Congress. The Commission also

declined to adopt this proposal as it would unduly complicate the

implementation and enforcement of the fee assessment program.

Establishing a cap on the amount of the fee might involve a calculation

that takes into account the size of a station, the market it serves,

the amount of feeable ancillary or supplementary services provided, and

numerous other factors which would certainly complicate the

establishment and enforcement of the fee assessment program. It would

be difficult, if not impossible, to determine on a license by license

basis what the auction value of that spectrum should be and thus where

a cap should be placed. Thus, ease of administration of the fee program

would be compromised by a cap on the total amount of fee payments.

Variable Fee Rate Depending Upon the Type of Service

41. The Commission sought comment as to whether the percentage rate

of the fee should vary with the type of service provided. Commenters

argued that the Commission should not take into account preferences for

one type of service over another in setting the fee and that varying

the level of the fee depending upon the service could discourage new

services and would exceed the Commission's authority. The percentage

rate of the fee will be fixed at five percent, for all services subject

to a fee. The Commission agreed that a varying fee rate could have the

effect of dissuading licensees from providing particular services. To

the extent that the fee is set lower for one service than for another,

it would create an incentive for a licensee to provide the service with

a lower fee rate over a service subject to a higher fee. The Commission

stated that it wished to establish a fee program that does not affect

broadcasters' decisions to provide one service over another, other than

the mandated free, over-the-air television service, and therefore did

not establish a fee which varies based upon the type of services

provided. In addition, a varying fee rate would be difficult to adhere

to and to enforce, in contravention of the Commission's goal of a fee

program that

[[Page 69214]]

is simple to comply with and administer.

Review of Fee Assessment Program

42. The 1996 Act requires the Commission to adjust the fee ``from

time to time in order to continue to comply with the requirements of''

the statute and to ``report to the Congress on the implementation of

the program'' within five years of the enactment of the 1996 Act.

43. The fee program established concerns services which are not yet

available to consumers. Once digital television licensees have

implemented ancillary or supplementary services, the Commission and the

licensees will have a better concept of what these services might

include and of the profit-making capacity of these services. The

Commission intends to review the fee assessment program established

herein by the time of our mandated report to Congress. Also, the

Commission may adjust our fee program as necessary to continue to

comply with the requirements of the statute.

IV. Collection of Fees

44. The 1996 Act requires that the Commission ``establish a program

to assess and collect . . . an annual fee or other schedule or method

of payment that promotes the objectives described'' above and that the

fee ``be adjusted by the Commission from time to time in order to

continue to comply with [these] requirements.'' The statute requires

that ``all proceeds obtained pursuant to the regulations required by

this subsection . . . be deposited in the Treasury.'' In addition, the

1996 Act requires that ``within 5 years after the date of enactment of

the [1996 Act] . . . the Commission shall report to the Congress on the

implementation of the program required by this subsection, and shall

annually thereafter advise the Congress on the amounts collected

pursuant to such program.'' Commenters did not address the collection

of fees pursuant to this program.

45. In order that the Commission fulfill its statutory obligation

to report to Congress on the program established here, and in order

that the Commission have the information necessary to adjust the fee

program as appropriate consistent with the use of the spectrum, as

discussed above, we will require all commercial DTV licensees to report

to the Commission on their use of the DTV bitstream. Each DTV licensee

will be required to file a new FCC form annually on December 1.

46. Pursuant to a Public Notice to be issued as soon as possible,

the Mass Media Bureau will issue a new reporting form, to be filed by

each DTV licensee on December 1 of each year. Beginning on December 1,

1999 all licensees will annually file the new reporting form

electronically with the Mass Media Bureau. For the report filed

December 1, 1999 only, licensees are to report on services provided

from the effective date of this R&O through September 30, 1999.

47. In filing licensees will report whether they provided ancillary

or supplementary services in the twelve-month period ending on the

preceding September 30. Licensees will further report, for the

applicable period: (1) a brief description of the services provided;

(2) which services were feeable ancillary or supplementary services;

(3) whether any ancillary or supplementary services provided were not

subject to a fee; (4) gross revenues received from all feeable

ancillary and supplementary services provided during the applicable

period; and (5) the amount of bitstream used to provide ancillary or

supplementary services during the applicable period. The licensee's

signature on the form will certify under penalty of perjury the

accuracy of the information reported. Failure to file the form

regardless of revenues from ancillary or supplementary services or

provision of such services may result in appropriate sanctions.

48. If a licensee has provided feeable ancillary or supplementary

services at any point during any twelve-month period ending on

September 30, the licensee must additionally annually file the FCC's

standard remittance form (Form 159) on the subsequent December 1.

Licensees will certify the amount of gross revenues received from

feeable ancillary or supplementary services for the applicable twelve-

month period and will remit the payment of the required fee. For

revenues reported December 1, 1999 only, licensees are to certify

revenues received from feeable ancillary or supplementary services

provided from the effective date of this R&O through September 30, 1999

and remit payment of the required fee for that period.

49. The instructions for Form 159 will be amended by Public Notice

to require DTV licensees to specify the amount of gross revenues

received from feeable ancillary or supplementary services and the fees

due. Pursuant to this R&O, section 1 of the Commission's rules is

amended to specify that licensees file Form 159 annually. The

instructions for Form 159 will be amended to require commercial DTV

licensees providing feeable ancillary or supplementary services to

annually file Form 159 on December 1 and to specify on line 19A the

call sign by which they are registered with the Commission; on line 20A

the payment type code; on line 23A the amount of gross revenues

received from feeable ancillary or supplementary services; on line 22A

the fee which they remit with Form 159, in the amount of five percent

of the amount specified on line 23A; and on line 24A the facility

identification number assigned to them by the Commission. The

licensee's signature on line 27 certifies under penalty of perjury the

accuracy of the information reported on Form 159.

50. The Mass Media Bureau will issue a Public Notice amending the

Advice Reference Guide for FCC Form 159, and the Mass Media Services

Fee Filing Guide. The Commission delegates authority to the Office of

the Managing Director to specify by Public Notice procedures for filing

and processing the fees required by this R&O. The Commission reserves

the right to audit each licensee's records which support the

calculation of the amount specified on line 23A of Form 159. Each

licensee, therefore, is required to retain such records for three years

from the date of remittance of fees pursuant to this R&O.

51. While the Commission does not here include automatic

confidentiality for information submitted pursuant to this R&O,

submission of the required reporting form, and/or remittance of fee

payment may be accompanied by a request for confidentiality pursuant to

47 CFR 0.459.

V. Conclusion

52. By this R&O and the accompanying rule, the Commission

establishes a program to assess a fee of five percent of gross revenues

received from the provision of feeable ancillary and supplementary

services as defined herein.

VI. Administrative Matters

53. Paperwork Reduction Act of 1995 Analysis. The action contained

herein has been analyzed with respect to the Paperwork Reduction Act of

1995 and found to impose new or modified reporting and recordkeeping

requirements or burdens on the public. Implementation of these new or

modified reporting and recordkeeping requirements will be subject to

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

Act. Accordingly, it is ordered that, pursuant to the authority

contained in section 4(i), 303, 336 and 403 of the Communications Act

of 1934, as amended, 47 U.S.C. 154(i), 303, 336 and 403, part 73 of the

Commission's Rules is amended.

[[Page 69215]]

54. It is further ordered that, pursuant to the Contract with

America Advancement Act of 1996, the rule amendments shall be effective

the later of either thirty days after publication in the Federal

Register, or upon receipt by Congress of a report in compliance with

the Contract with America Advancement Act of 1996, Public Law 104-121,

or as soon thereafter as may be approved by the Office of Management

and Budget.

55. It is further ordered that the Commission's Office of Public

Affairs, Reference Operations Division, shall send a copy of this R&O,

including the FRFA, to the Chief Counsel for Advocacy of the Small

Business Administration.

56. It is further ordered that this proceeding is terminated.

Final Regulatory Flexibility Analysis

57. As required by the Regulatory Flexibility Act (RFA), an Initial

Regulatory Flexibility Analysis (IRFA) was incorporated in the Notice

of Proposed Rule Making is R&O. The Commission sought written public

comment on the proposals in the Notice of Proposed Rule Making,

including comment on the IRFA. This present Final Regulatory

Flexibility Analysis (FRFA) conforms to the RFA.

Need for, and Objectives of, the Report and Order: The 1996 Act

directed the Commission to adopt regulations allowing licensees to use

a portion of the DTV spectrum to provide feeable ancillary or

supplementary services and to establish a program to assess and collect

a fee for these services. In the Fifth R&O we established rules

permitting broadcasters to offer feeable ancillary or supplementary

services on the DTV spectrum. As directed by Congress, in this

proceeding we adopt a program for assessing and collecting a fee for

the feeable ancillary or supplementary use of the DTV spectrum.

Summary of Significant Issues Raised by Public Comments In Response

to the IRFA: No comments were received specifically in response to the

IRFA attached to the Notice of Proposed Rule Making.

Description and Estimate of the Number of Small Entities To Which Rules

Will Apply Definition of a ``Small Business''

58. Under the RFA, small entities may include small organizations,

small businesses, and small governmental jurisdictions. 5 U.S.C.

601(6). The RFA, 5 U.S.C. 601(3), generally defines the term ``small

business'' as having the same meaning as the term ``small business

concern'' under the Small Business Act, 15 U.S.C. 632. A small business

concern is one which: (1) is independently owned and operated; (2) is

not dominant in its field of operation; and (3) satisfies any

additional criteria established by the Small Business Administration

(``SBA''). Pursuant to 4 U.S.C. 601(3), the statutory definition of a

small business applies ``unless an agency after consultation with the

Office of Advocacy of the SBA and after opportunity for public comment,

establishes one or more definitions of such term which are appropriate

to the activities of the agency and publishes such definition(s) in the

Federal Register.'' As discussed below, the SBA defines a television

broadcast station that has no more than $10.5 million in annual

receipts as a small business.

Issues in Applying the Definition of a ``Small Business''

59. The estimates, below, reflect the Commission's best judgments

based on the data available to us. An element of the definition of

``small business'' is that the entity not be dominant in its field of

operation. The Commission is unable at this time to define or quantify

the criteria that would establish whether a specific radio or

television station is dominant in its field of operation. Accordingly,

the following estimates of small businesses to which the new rules will

apply do not exclude any radio or television station from the

definition of a small business on this basis and are therefore

overinclusive to that extent. An additional element of the definition

of ``small business'' is that the entity must be independently owned

and operated.

60. With respect to applying the revenue cap, the SBA has defined

``annual receipts'' specifically in 13 CFR 121.104, and its

calculations include an averaging process. We do not currently require

submission of financial data from licensees that we could use in

applying the SBA's definition of a small business. Thus, for purposes

of estimating the number of small entities to which the rules apply, we

are limited to considering the revenue data that are publicly

available, and the revenue data on which we rely may not correspond

completely with the SBA definition of annual receipts.

61. Under SBA criteria for determining annual receipts, if a

concern has acquired an affiliate or been acquired as an affiliate

during the applicable averaging period for determining annual receipts,

the annual receipts in determining size status include the receipts of

both firms. 13 CFR 121.104(d)(1). The SBA defines affiliation in 13 CFR

121.103. In this context, the SBA's definition of affiliate is

analogous to our attribution rules. Generally, under the SBA's

definition, concerns are affiliates of each other when one concern

controls or has the power to control the other, or a third party or

parties controls or has the power to control both. 13 CFR

121.103(a)(1). The SBA considers factors such as ownership, management,

previous relationships with or ties to another concern, and contractual

relationships, in determining whether affiliation exists. 13 CFR

121.103(a)(2). Instead of making an independent determination of

whether television stations were affiliated based on SBA's definitions,

we relied on the databases available to us to provide us with that

information.

Estimates Based on Census Data

62. The rules adopted in this Report and Order will apply to

commercial DTV licensees. The Small Business Administration defines a

television broadcasting station that has no more than $10.5 million in

annual receipts as a small business. Television broadcasting stations

consist of establishments primarily engaged in broadcasting visual

programs by television to the public, except cable and other pay

television services. Included in this industry are commercial,

religious, educational, and other television stations. Also included

are establishments primarily engaged in television broadcasting and

which produce taped television program materials are classified under

another SIC number.

63. There were 1,509 television stations operating in the nation in

1992. That number has remained fairly constant as indicated by the

approximately 1,583 operating television broadcasting stations in the

nation as of September 1998. For 1992, the (approximately 77%) number

of television stations that produced less than $10.0 million in

revenue, and we estimate that was approximately 1,155 establishments.

Thus, the rules adopted here may affect approximately 1,583 television

stations; approximately 77%, or 1,219 of those stations are considered

small businesses. These estimates may overstate the number of small

entities because the revenue figures on which they are based do not

include or aggregate revenues from non-television affiliated companies.

Description of Projected Reporting, Recordkeeping, and Other

Compliance Requirements: The R&O adopts modifications to existing

reporting and recordkeeping requirements. The fee program established

here will require

[[Page 69216]]

licensees annually to file a new reporting form to be issued later.

Licensees will be required to report whether they provided ancillary or

supplementary services, the ancillary or supplementary services

provided, the services provided which are subject to a fee, gross

revenues received from all feeable ancillary and supplementary

services, and the amount of bitstream used to provide ancillary or

supplementary services. Licensees providing services subject to a fee

will additionally be required annually to file FCC Form 159 in

remittance of the fee. So that the Commission may audit licensees'

records supporting the calculation of the fees due, each licensee will

be required to retain such records for three years from the date of

remittance of fees.

Steps Taken to Minimize Significant Economic Impact on Small Entities,

and Significant Alternatives Considered:

64. This Report and Order establishes a program for assessing and

collecting fees for the ancillary or supplementary use of the digital

television spectrum. In the Notice of Proposed Rule Making, a variety

of alternatives were proposed and we additionally sought comment on

whether any of the proposed approaches would have a significant

economic impact on any class of small licensee or permittee. We

considered all alternatives presented in the comments. The rules

adopted here are required to implement provisions of the 1996 Act.

These proposed rules and policies may affect broadcast television

licensees, some of which are small businesses. The Commission believes

that the rules adopted here are necessary to the recovery of a portion

of the value of the public spectrum and to promote the development of

innovative uses of the DTV capacity.

Federal Rules That May Duplicate, Overlap, or Conflict With the

Proposed Rules

65. Adoption of this Report and Order will necessitate the revision

of 47 CFR 73.624 to add a new Sec. 73.624(g).

Report to Congress:

66. The Commission will send a copy of the R&O, including this

FRFA, in a report to be sent to Congress pursuant to the Small Business

Regulatory Enforcement Fairness Act of 1996, see 5 U.S.C. 801(a)(1)(A).

In addition, the Commission will send a copy of the R&O, including

FRFA, to the Chief Counsel for Advocacy of the Small Business

Administration. A copy of the R&O and FRFA (or summaries thereof) will

also be published in the Federal Register. See 5 U.S.C. 604(b).

List of Subjects in 47 CFR Part 73

Television, television broadcasting.

Federal Communications Commission.

Magalie Roman Salas,

Secretary.

Rule Changes

Part 73 of Title 47 of the Code of Federal Regulations is amended

to read as follows:

PART 73--[AMENDED]

1. The authority citation for part 73 continues to read as follows:

47 U.S.C. 154, 303, 334, 336

2. Section 73.624 is revised by adding a new paragraph (g) to read

as follows:

Sec. 73.624 Digital Television Broadcast Stations

* * * * *

(g) Commercial DTV licensees must annually remit a fee of five

percent of the gross revenues derived from all ancillary or

supplementary services, as defined by paragraph (b) hereof, which are

feeable, as defined in paragraphs (i) through (ii) hereof.

(1)(i) All ancillary or supplementary services for which payment of

a subscription fee or charge is required in order to receive the

service are feeable. The fee required by this provision shall be

imposed on any and all revenues from such services, including revenues

derived from subscription fees and from any commercial advertisements

transmitted on the service.

(ii) Any ancillary or supplementary service for which no payment is

required from consumers in order to receive the service is feeable if

the DTV licensee directly or indirectly receives compensation from a

third party in return for the transmission of material provided by that

third party (other than commercial advertisements used to support

broadcasting for which a subscription fee is not required). The fee

required by this provision shall be imposed on any and all revenues

from such services, other than revenues received from a third party in

return for the transmission of commercial advertisements used to

support broadcasting for which a subscription fee is not required.

(2) Payment of fees. (i) Each December 1, all commercial DTV

licensees will electronically report whether they provided ancillary or

supplementary services in the twelve-month period ending on the

preceding September 30. Licensees will further report, for the

applicable period: (A) a brief description of the services provided;

(B) which services were feeable ancillary or supplementary services;

(C) whether any ancillary or supplementary services provided were not

subject to a fee; (D) gross revenues received from all feeable

ancillary and supplementary services provided during the applicable

period; and (E) the amount of bitstream used to provide ancillary or

supplementary services during the applicable period. Licensees will

certify under penalty of perjury the accuracy of the information

reported. Failure to file regardless of revenues from ancillary or

supplementary services or provision of such services may result in

appropriate sanctions.

(ii) If a commercial DTV licensee has provided feeable ancillary or

supplementary services at any point during a twelve-month period ending

on September 30, the licensee must additionally file the FCC's standard

remittance form (Form 159) on the subsequent December 1. Licensees will

certify the amount of gross revenues received from feeable ancillary or

supplementary services for the applicable twelve-month period and will

remit the payment of the required fee.

(iii) The Commission reserves the right to audit each licensee's

records which support the calculation of the amount specified on line

23A of Form 159. Each licensee, therefore, is required to retain such

records for three years from the date of remittance of fees.

[FR Doc. 98-33065 Filed 12-15-98; 8:45 am]

BILLING CODE 6712-01-P