[Federal Register Volume 60, Number 5 (Monday, January 9, 1995)]
[Proposed Rules]
[Pages 2365-2367]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-439]
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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
On September 18, 1989, the Copyright Office published a Notice of
Inquiry (NOI) in Docket No. RM 89-2 to inform the public that it was
examining the issues of merger and acquisition of cable systems and
their impact on the computation and reporting of royalties under the
cable compulsory license, 17 U.S.C. 111. 54 FR 38390 (1989). At the
heart of the 1989 NOI were the royalty filing questions raised by the
application of the ``contiguous communities'' provision of the section
111(f) definition of a cable system. That provision provides that two
or more cable facilities are considered as one cable system if the
facilities are either in contiguous communities under common ownership
or control or operating from one headend. See also 37 CFR 201.17(b)(2).
The Office highlighted some of the difficulties created by cable
systems in contiguous communities becoming a single system through
either merger or acquisition by a common owner:
For example, assume a situation where there are two completely
independent but contiguous cable systems. System A carries two non-
permitted (3.75% rate) independent station signals and System B,
assigned a different television market, 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
[[Page 2366]] 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. 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).
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. 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. 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:
(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
[[Page 2367]] 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
\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. 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
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]
BILLING CODE 1410-31-P
