Cable Compulsory License: Notice of Inquiry Regarding Merger of Cable Systems and Individual Pricing of Broadcast Signals

LIBRARY OF CONGRESS

Copyright Office

37 CFR Part 201

[Docket No. RM 89-2A]

Cable Compulsory License: Notice of Inquiry Regarding Merger of

Cable Systems and Individual Pricing of Broadcast Signals

AGENCY: Copyright Office, Library of Congress.

ACTION: Extension of comment period.

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SUMMARY: The Copyright Office is reopening the comment period in Docket

RM 89-2 (Merger of Cable Systems) to broaden the scope of this

proceeding. Specifically, the Office seeks comment as to the copyright

royalty implications of a la carte offerings of broadcast signals by

cable operators and the permissibility of allocating gross receipts

among subscriber groups for a la carte signals in computing royalties

due under the cable compulsory license of the Copyright Act.

DATES: Initial comments should be received by February 23, 1995. Reply

comments should be received by February 8, 1995.

ADDRESSES: Interested persons should submit fifteen copies of their

written comments, if delivered by mail, to: Copyright GC/I&R, P. O. Box

70400, Southwest Station, Washington, D.C. 20024. If delivered by hand,

fifteen copies should be brought to: Office of the General Counsel,

James Madison Memorial Building, Room LM-407, 101 Independence Avenue,

S.E., Washington, D.C. 20540.

FOR FURTHER INFORMATION CONTACT: Marilyn J. Kretsinger, Acting General

Counsel, Copyright GC/I&R, P. O. Box 70400, Southwest Station,

Washington, D.C. 20024. Telephone (202) 707-8380. Telefax: (202) 707-

8366.

SUPPLEMENTARY INFORMATION:

I. Background

rket, carries the same two

independent station signals but on a permitted (base rate) basis,

plus a superstation signal on a non-permitted (3.75% rate) basis.

Systems A and B are purchased by the same parent company and

apparently become a single cable system for purposes of the

compulsory license. The purchase raises several problematic issues

as to the calculation of the proper royalty fee. Should the

independent stations be paid for at the 3.75% rate or the non-3.75%

rate system-wide, or should the rates be allocated among subscribers

within the system and, if so, on what basis? Furthermore, if

allocation is the answer, what rate can be attributed to new

subscribers to the merged system? Finally, there is the question of

the superstation signal which is only carried by former cable System

B. At the time of acquisition, should the superstation be attributed

throughout the entire system, even though many subscribers do not

receive the signal (a so-called `phantom' signal)? And which

system's market quota (A's or B's) should be used for the entire

statement?

54 FR at 38391

Based on the above scenario, the Office also formally posed a set

of further questions--many of which addressed the creation of

subscriber groups for attributing signals and royalty rates. Among

these questions were whether cable operators should be allowed to

attribute distant signals among their subscribers in accordance with

the conditions that existed prior to the merger or acquisition, and

whether cable operators should only be required to include in gross

receipts the revenues generated from subscribers who actually

received a broadcast signal. Id. at 38391-92.

Several parties, who commented on the 1989 NOI, proposed a possible

``solution'' to the above described scenario.1 Their proposal is a

two step approach: aggregation, and then allocation of gross receipts

isition, and

whether cable operators should only be required to include in gross

receipts the revenues generated from subscribers who actually

received a broadcast signal. Id. at 38391-92.

Several parties, who commented on the 1989 NOI, proposed a possible

``solution'' to the above described scenario.1 Their proposal is a

two step approach: aggregation, and then allocation of gross receipts.

Cable systems would first aggregate the gross receipts of all of their

subscribers to determine which Copyright Office form (and hence royalty

rates) to use; then cable systems would report carriage of distant

signals according to subscriber groups. Thus, in the above example

provided by the Office in the 1989 NOI, Systems A and B would aggregate

their gross receipts to determine which form to use (either SA 1-2 or

SA-3) and the corresponding royalty rates, and then continue to file

separately (i.e. as they were filing prior to the merger/acquisition).

Thus, if System A and B's aggregated gross receipts total was in excess

of $292,000, both systems would file a separate form SA-3 with the

corresponding royalty rates. System A would file an SA-3 and report two

non-permitted independent signals at the 3.75% rate, based only on the

gross receipts of the subscribers in the communities System A serves.

System B would also file an SA-3 and report both the non-permitted

3.75% superstation signal and those same two independent signals on a

permitted basis, based on the gross receipts of the subscribers in the

communities System B serves. See comments of American Television and

Communications Corp. at 10; comments of Baraff, Koerner, Olender &

Hochberg, P.C. at 2-3; comments of Adelphia Communication Corp et. al.

at 10; comments of National Cable Television Association at 13;

comments of Program Suppliers at 7-9. But see comments of Joint Sports

Claimants at 3

ss receipts of the subscribers in the

communities System B serves. See comments of American Television and

Communications Corp. at 10; comments of Baraff, Koerner, Olender &

Hochberg, P.C. at 2-3; comments of Adelphia Communication Corp et. al.

at 10; comments of National Cable Television Association at 13;

comments of Program Suppliers at 7-9. But see comments of Joint Sports

Claimants at 3. The referenced commentators argue that this approach is

consistent with the ``contiguous communities'' provision of section

111(f) since that provision speaks only to how systems are to be

classified, not how they are to report carriage, and sustains the

purpose of the provision to prevent fragmentation of cable

systems.2

\1\Although the Copyright Office has reviewed the comments, it

has not reached any conclusions or decisions with regard to the

suggestions proposed by the various commentators.

\2\''Fragmentation'' is the practice whereby a cable system

separates or ``fragments'' its system into as series of smaller

systems filing separate forms, usually the SA 1-2, and corresponding

lower royalty rates. The purpose of fragmentation its to reduce the

operator's overall gross receipts and thereby create a substantially

lower royalty payment under the cable license.

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The referenced commentators' proposal advocates the creation of

``subscriber groups'' within a single cable system, requiring

allocation of gross receipts to specific groups of subscribers and

application of varying royalty rates to those groups. Until now, the

Copyright Office has looked with disfavor on allocation of gross

receipts based on subscriber groups, since allocation among different

subscribers, with one exception, is not specifically recognized by

section 111 and creates problems in applying the royalty rates.3

The only express allowance for allocation in section 111 is the

partially local/partially distant provision of section 111(d)(1)(B)

yright Office has looked with disfavor on allocation of gross

receipts based on subscriber groups, since allocation among different

subscribers, with one exception, is not specifically recognized by

section 111 and creates problems in applying the royalty rates.3

The only express allowance for allocation in section 111 is the

partially local/partially distant provision of section 111(d)(1)(B).

That section provides that ``in the case of any cable system located

partly within and partly without the local service area of a primary

transmitter, gross receipts shall be limited to those gross receipts

derived from subscribers located without the local service area of such

primary transmitter.'' There are now other ``subscriber group'' and

gross receipts allocation issues beyond those of section 111(d)(1)(B)

and those presented by the merger and acquisition of cable systems.

\3\The royalty rate problems include identifying the signals to

which the 3.75% rate applies and in the case of permitted signals,

what is the order of the DSE (first, second, third).

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II. The 1992 Cable Act

In 1992 Congress passed the ``Cable Television Consumer Protection

and Competition Act of 1992'' (1992 Cable Act) which, among other

things, regulates the rates that cable operators may charge their

subscribers for cable programming services. Although the 1992 Cable Act

is telecommunications legislation, and not copyright, its passage has

created additional issues related to creation of subscriber groups and

allocation of gross receipts to those addressed in our 1989 NOI.

The 1992 Cable Act permits the Federal Communications Commission,

and in some cases local franchising authorities, to regulate the rates

charged by cable operators for both broadcast and nonbroadcast

programming services

n, and not copyright, its passage has

created additional issues related to creation of subscriber groups and

allocation of gross receipts to those addressed in our 1989 NOI.

The 1992 Cable Act permits the Federal Communications Commission,

and in some cases local franchising authorities, to regulate the rates

charged by cable operators for both broadcast and nonbroadcast

programming services. While packages or ``tiers'' of programming

services are subject to rate regulation, Congress excluded per-channel

service offerings from such regulation. These per-channel offerings are

known as a la carte signals because, to be exempt from rate regulation,

subscribers must have a ``realistic choice'' in deciding whether to

receive the signal. Report and Order and Further Notice of Proposed

Rulemaking in MM Docket 92-266, 8 FCC Rcd. 5631 327-328 & n. 808.

The exemption from rate regulation for a la carte signals

encourages cable operators to offer some, if not all of their services

(beyond the basic tier required by the 1992 Cable Act to be provided to

all subscribers), on a subscriber choice basis. Thus, for example, a

cable operator might offer subscribers three distant superstation

signals (WTBS, WWOR, WGN, etc.) at $3 a month per signal. A subscriber

could choose any combination of these signals, or none at all, and pay

only the per signal charges for those signals selected. The result is a

number of distant signal offerings by the cable operator, with varying

numbers of subscribers within the system selecting, receiving, and

paying separately for each signal.

With the increasing ability of cable operators to offer subscribers

essentially ``one signal tiers'' of broadcast stations, issues arise as

to the proper calculation and reporting of royalty fees under the

section 111 cable compulsory license

nal offerings by the cable operator, with varying

numbers of subscribers within the system selecting, receiving, and

paying separately for each signal.

With the increasing ability of cable operators to offer subscribers

essentially ``one signal tiers'' of broadcast stations, issues arise as

to the proper calculation and reporting of royalty fees under the

section 111 cable compulsory license. If every distant signal offering

is allocated to the entire subscriber base of the cable system, ``one

signal tiers'' that are purchased by just a few of the cable system's

subscribers could result in costing the cable system more in royalties

than the income it gets from the few subscribers. As noted above, the

Copyright Office has had a longstanding policy against creation of

subscriber groups and allocation of gross receipts, except as provided

for in section 111(d)(1)(B). By extending the comment period in this

proceeding, the Office is now re-examining this policy in both the

context of merger and acquisition of cable systems and a la carte

broadcast signals.

III. Extension of Comment Period

Because the royalty issues presented by a la carte broadcast

signals resemble many of those presented by the merger and acquisition

of cable systems, the Copyright Office is reopening this proceeding to

receive comment on how compulsory license royalty payments should be

made for a la carte offerings of broadcast signals by cable operators.

Specifically, the Office seeks comment on the following inquiries:

yalty issues presented by a la carte broadcast

signals resemble many of those presented by the merger and acquisition

of cable systems, the Copyright Office is reopening this proceeding to

receive comment on how compulsory license royalty payments should be

made for a la carte offerings of broadcast signals by cable operators.

Specifically, the Office seeks comment on the following inquiries:

(a) As described in the ``System A and System B'' example in the

1989 NOI to this proceeding, a ``phantom'' signal problem occurs when

the superstation carried by System B is attributed to all subscribers

throughout the merged systems, even though the subscribers in former

System A do not actually receive the signal. In the case of a la carte

broadcast signals, should carriage of each distant broadcast signal be

attributed throughout the entire subscription base, even if many

subscribers do not actually receive the signal. The

Copyright Office has historically required such attribution, based upon

its interpretation that the Copyright Act permits only allocation of

gross receipts among subscriber groups for partially local/partially

distant signals. Does the 1992 Cable Act, or other circumstances,

warrant a change in this interpretation? If so, on what basis?

(b) It has been suggested by some that the Copyright Office should

permit creation of subscriber groups for a la carte broadcast signals,

and allow cable operators to allocate gross receipts only to those

subscribers who select and receive a particular signal. Thus, for

example, if a cable system has 1000 subscribers and only 500 of them

choose to receive superstation X, the distant signal equivalent (DSE)

value generated by superstation X would only be applied against the

gross receipts generated from the 500 subscribers who took the

superstation, as opposed to applying it against the system's total

gross receipts.4

d receive a particular signal. Thus, for

example, if a cable system has 1000 subscribers and only 500 of them

choose to receive superstation X, the distant signal equivalent (DSE)

value generated by superstation X would only be applied against the

gross receipts generated from the 500 subscribers who took the

superstation, as opposed to applying it against the system's total

gross receipts.4

\4\This example assumes the cable system is an SA-3 form system,

and therefore makes royalty payments based on the number of DSE's

carried.

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One concern with allowing that would be that it would offer the

cable system an incentive to pull its distant signals from its basic

tier offering, and offer them only as a la carte signals, thus reducing

the subscriber base from which the royalty is calculated.

The Cable Act of 1992 has made it more difficult for cable systems

to restructure their distant signal offerings because it states that,

for a basic tier subject to rate regulation, ``such basic service tier

shall, at a minimum, consist of * * * (iii) any signal of any

television broadcast station that is provided by the cable operator to

any subscriber, except a signal which is secondarily transmitted by a

satellite carrier beyond the local service area of such station.'' 47

USC 543 (b) (7) (iii).

Therefore, for distant signals that are imported by means other

than satellite carrier, if the cable system offers it to one

subscriber, it must offer it to all on the basic tier. In 1989, 48.2%

of all instances of distant signal carriage on a Form 3 cable system

were by means other than satellite carrier. 1989 Cable Royalty

Distribution Proceeding, 57 FR 15286, 15294 (1992).

However, 51.8% of distant signal carriage in 1989 was by means of

satellite carrier, and those signals could be pulled from the basic

tier without violating the 1992 Cable Act

on the basic tier. In 1989, 48.2%

of all instances of distant signal carriage on a Form 3 cable system

were by means other than satellite carrier. 1989 Cable Royalty

Distribution Proceeding, 57 FR 15286, 15294 (1992).

However, 51.8% of distant signal carriage in 1989 was by means of

satellite carrier, and those signals could be pulled from the basic

tier without violating the 1992 Cable Act. In addition, cable systems

that are not subject to basic tier rate regulation because there is

effective competition in the system's franchise area, are also free to

restructure.

What would be the statutory basis for allowing a la carte

allocation, and what effect would it have on the total amount of

royalties paid?

(c) If the Copyright Office allowed the type of gross receipts

allocation described in question (b), what is the proper royalty rate

to assess against the gross receipts of each subscriber group? For

example, if a cable system carried two distant signals on an a la carte

basis, one a permitted signal and the other a non-permitted signal at

the 3.75% rate, how can it be determined which subscriber group is

receiving the less expensive base rate permitted signal, and which

group is receiving the more expensive 3.75% rate non-permitted signal?

Obviously, there is a powerful incentive for the cable operator to

assign the 3.75% rate to the signal with the fewest subscribers, and

hence the lowest amount of gross receipts. A similar problem occurs in

applying the decreasing rates for permitted signals. Are there any

fixed factors which the Copyright Office could apply to prevent the

repeated occurrence of applying the lower rate against the higher gross

receipts? What effect would that have on the total royalty pool

generated by section 111?

The Copyright Office requests comment on the questions raised in

this extended comment period, as well as any other issues related to

compulsory license royalty payments for a la carte offerings of

broadcast signals.

List of Subjects

peated occurrence of applying the lower rate against the higher gross

receipts? What effect would that have on the total royalty pool

generated by section 111?

The Copyright Office requests comment on the questions raised in

this extended comment period, as well as any other issues related to

compulsory license royalty payments for a la carte offerings of

broadcast signals.

List of Subjects

Cable compulsory license; Cable television systems.

Dated: December 29, 1994.

Marybeth Peters,

Register of Copyrights.

Approved by:

James H. Billington,

The Librarian of Congress.

[FR Doc. 95-439 Filed 1-6-95; 8:45 am]

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